Can you recollect the global economic crisis that began more than a decade ago? In 2008, the fund crisis was extremely devastating for many countries, including America (the superpower) which was thriving at the time. Bitcoin was introduced in the year 2008 by a person called Satoshi Nakamoto whose identity still remains a mystery. The fact is, however, that he was not the first person to come up with the idea. Maybe the intention behind it was to come up with a flexible payment system that could be used internationally, which was also decentralized and did not have any kind of financial body behind it. However, this article shall explain in detail what are the features of the Official Digital Currency Bill, 2021, and how a Blockchain Mechanism which is a fundamental aspect of digital currency works.
What to anticipate from the Cryptocurrency Bill, 2021
Looking at the present status of cryptocurrency, we can foresee that the use of cryptos as a currency will not be allowed in the country, though there is an indication from the Government that it will regulate cryptocurrencies and treat them as an asset instead. Taxing is one of the factors which has to be considered while thinking about the introduction of cryptocurrency. According to an expert’s comment, The 2019 Bill will have to be overhauled. as the bill lacks comprehension of the highly complex cryptocurrency business. In addition to that, in today’s scenario, everyone is so inclined towards investing in crypto that it is next to impossible to ban it.
According to Mr. Nitin Agarwal who is a co-founder of B21 (a crypto platform) has made a which states that there will be a regulatory mechanism for cryptocurrency and not a blanket ban. Let us understand the mechanism of the crypto-verse. First of all, crypto trading will be allowed only through platforms or exchanges which are officially recognized by the Government. There will be a new regulatory body introduced under the ambit of RBI. Secondly, since crypto engages in cross-border transactions, a Securities Exchange Board of India-like body will be given the authority to monitor the trading system. Investors are considered the most important people in the corporate world and so the protection of their interests becomes extremely indispensable. Checks and balances will be required for avoiding unpleasant circumstances such as fraud. Norms and penalties will have to be noted with regard to fraud against investors. It is recommended that existing laws such as Consumer Protection Act, FEMA, Indian Contract Act, Information Technology Act, Prevention of Money Laundering Act, Payments and Settlement Systems Act, Deposits related laws, Securities laws, Taxation laws shall be given more emphasis while dealing in crypto-asset business activity.
Features of an Official Digital Currency Bill
Blanket Ban
The cryptocurrency and regulation of the Official Digital Currency Bill, 2021 will be tabled in the Parliament during the Winter session which will provide a facilitative framework for the creation of official digital currency which will be issued by the Reserve Bank of India. The main intention behind this bill is to ban the outflow of all private cryptocurrencies though there would be certain exceptions. At the beginning of 2021, the Indian Government was stubborn in its decision against the introduction of cryptocurrency and also insisted on a blanket ban on it. However, according to experts, people across the world would be in a position to hold such currency which contains segments of code that cannot be “banned” and will also agree for use as a medium of exchange which in turn will lend the values.
Private cryptocurrency issues
There exists increased confusion amongst people with regard to private cryptocurrencies. However, the Government has also not yet classified them. But, if we look at the definition, transactions in most cryptocurrencies are linked to wallet addresses. That is the reason we call them public cryptocurrencies. Also, there are categories of crypto which are engaged in anonymous blockchain transactions. Such coins conceal the user’s real wallet and address and at times, end up combining multiple transactions with each other to elude the chain study and these are referred to as “Private Crypto Currencies”. Cryptocurrencies such as bitcoin are not under the ownership of any kind of team so they cannot be called Private Cryptocurrencies. But the controlling powers and implementation of any change of these cryptocurrencies are with the miners and developers. As mentioned above, the classification of private cryptocurrencies is still obscure. More than 99% of all cryptocurrencies are designed by developers or companies and not by the Government.
Ownership
As mentioned above, the Government is mainly focusing on the ownership of cryptocurrencies. Major well-known cryptocurrencies such as Bitcoin, Ethereum may face a ban if the Government classifies them on the basis of ownership. Bitcoin, Ethereum, and other popular currencies are not controlled or managed by any private entity. Transactions take place on the public ledger and are therefore known as public cryptocurrencies. There have been ample private cases such as phishing scams, investment or business opportunity scams, cloud mining scams, etc. in the past. So, if the Government is looking to ban such private cryptocurrencies, then it can be seen as a prudent move.
No replacement of fiat currency
If we study the Bill, then it can be understood that the concept of cryptocurrencies will never become legal tender in India. The preliminary idea behind the cryptocurrency was to come up as an alternative to fiat currency which is owned, controlled, regulated by a Government body. However, El-Salvador has already embraced Bitcoin as a legal tender. The scenario in India parallels this situation. In an economy like India, be it Bitcoin or any other cryptocurrency, it will not replace fiat currency in any of the circumstances.
Introduction of new currency
The current Governor of RBI Mr. Shaktikanta Das appears critical about cryptocurrencies but it is definite that the central bank is going to introduce a fresh currency in the market. The Central Bank previously had shown the intent of introducing a digital currency in the past though it is reluctant to reveal any intricacies about it. RBI’s stand is clear on the subject as to how cryptocurrency can prove a threat to the economy in the future. However, the Regulation of Official Digital Currency Bill, 2021 highlights that RBI-backed official digital currency shall be introduced soon.
Promotion of new crypto
It is often believed that this proposed banning of Official Digital Currency Bill, 2021 is also to promote fresh RBI-backed crypto. It is said that the Government may only permit crypto exchange through platforms and enable exchange officially recognized by the Government. Speculations say that there can be a newly established body for cryptocurrencies that may be brought under the ambit of RBI.
Blockchain : the technology behind the digital currency
What is a Blockchain Mechanism
A blockchain can be defined as a digital ledger of transactions maintained by a network of computers in a way that makes it tedious to hack or alter the process. However, it is a secure method for individuals to directly deal with each other without intermediaries such as banks and the Government or other third parties. In Blockchain, the growing list of records called blocks is linked to each other with the help of cryptography. Each and every transaction is independently verified by peer-to-peer computer networks, time-stamped and added to a growing chain of data, and then once the data is rewarded there are zero chances to alter it. Blockchain is becoming popular with the increasing use of Bitcoin, Ethereum, and other cryptocurrencies and provides us with promising applications for legal contracts, proper sales, medical records, and any other industry that needs to authorize and record services of actions or transactions.
How does it work
I would like to cite an illustration of the bitcoin system as an example, here is how the Blockchain mechanism operates.
Firstly, the purchase and sale of bitcoin are entered and transmitted to a network of supercomputers which are called nodes.
The work of these nodes around the world confirms the transaction with the help of computer algorithms which is also known as bitcoin mining. If the miner successfully completes a new block, (block in the chain contains a series of transactions) he is rewarded with bitcoin for their work, and the rewards are paid in the form of newly minted bitcoin and network fees which are passed on to the buyer and seller and the fees increase or decrease depending on the volume of transactions.
After the purchase is cryptographically assured, the sale is then added to a block on distributed ledger and the sale is then confirmed by a majority of the network.
A cryptographic fingerprint is issued to chain all previous blocks of bitcoin transactions and then the sale is further processed.
This concept of Blockchain technology first appeared in 1982 in academic papers in which it was discussed as “the design of a distributed computer system which can be established, maintained and most importantly trusted by mutually suspicious groups”. But it was in the year 2008 as mentioned earlier, that Satoshi Nakamoto’s paper titled “Bitcoin: A peer to peer electronic cash system which had introduced an academic theory into real-world use”gained traction.
Conclusion
The report of SC Garg Committee had categorically said that “All the types of cryptocurrency have been created by non-sovereigns and are in true sense entirely private enterprises and there is a less underlying intrinsic value of these private cryptocurrencies due to which they lack all attributes of a currency.”
Cryptocurrency will fail to satisfy the purpose of currency because private cryptocurrency is not so consistent with the essentials of money/currency. However, it is recommended that the Government should keep an open view with regards to an official digital currency. The new bill was introduced in the Winter Session of Parliament on 29th November 2021 which eliminated the word “Banning” from the bill which was introduced in 2019. However, the object of the new bill proposed in Lok Sabha maintains “to prohibit all private cryptocurrencies in India and yet to provide certain exceptions to promote the underlying technology and its uses.”
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This article is written by Akshita Rohatgi, from Guru Gobind Singh Indraprastha University, New Delhi. It explains the changes brought forth by the 126th Constitutional Amendment Bill which came into force on 25th January, 2020 and further sheds light on the circumstances surrounding its passage.
It has been published by Rachit Garg.
Table of Contents
Introduction
Bill No. 371-F of 2019, better known as the 126th Constitutional Amendment Bill, was introduced in the Lok Sabha on 10th December 2019. Presented by Shri Ravi Shankar Prasad, Minister of Law and Justice in the winter session, its passage was a unanimous ‘Aye’ from the parliament. Within three days of extensive debates, the Bill was passed by both houses of the Central Legislature after receiving a thumbs up from the Rajya Sabha on 12th December 2019. It subsequently received the ratification of more than half of Indian states. The Bill converted into an Act on 20th January 2020 after receiving Presidential assent. It came into force on 25th January 2020 as the 104th Amendment Act to the Indian Constitution. This article is to elucidate on and analyze the provisions of the Bill.
Need for the 126th Constitutional Amendment
Article 334 of the Constitution of India provides representation by reservations to members of the Scheduled Castes (SCs) and Scheduled Tribes (STs); and nomination of Anglo-Indians to the legislature. The provisions for representation under Article 334 were set to expire within 70 years of the enactment of the Constitution. In other words, the system of reservations and nominations would expire on 25th January 2020 unless extended further.
Even though SCs and STs have made considerable progress since the enactment of the Indian Constitution, the reasons which weighed with the Constituent Assembly in making provisions for reservation of seats have not yet ceased to exist. Thus, with a view to retaining the inclusive characters envisioned by India’s founding fathers, the 126th Constitutional Amendment Bill (hereinafter referred to as ‘the Bill’) proposed to extend reservations for SCs and STs for another 10 years, till January 25th, 2030.
Background
At the time of enactment of the Indian Constitution on 26th January 1950, the provision for reservation of Article 334 was to expire within 10 years, i.e., on 25th January 1960. However, subsequent governments felt that the communities still faced a significant level of hardships. Though SCs and STs made considerable progress since the promulgation of the Constitution, their position in society had not improved to the extent the Constitution makers had envisioned.
Consequently, time and again, amendments were made to extend the system of reservations and nominations by 10 years at a time. These amendments were-
Courtesy of the 95th Amendment, Article 334 provided that reservations and nomination of members under the Article shall cease within 70 years of the commencement of the Indian Constitution. This applied to the representation only in the House of People and Legislative Assemblies of the states.
The 126th Amendment Bill substituted seventy years of reservations for the SC and ST community to 80 years. Concerning the nomination of members of the Anglo-Indian community, it chose to maintain the status quo by substituting the words ‘70 years’. This ensured that the representation of Anglo-Indians expired on 25th January 2020.
Provisions related to Anglo – Indians
The term ‘Anglo-Indians’ has been defined in Article 366(2) of the Constitution. It is used to refer to a native of India whose father or any male progenitor in the paternal line is of European descent. This definition encompasses children of British and Indian parents, including communities like Portuguese Goans.
The efforts of Frank Anthony, President of the All India Anglo- Indian Association was a central figure in securing this nomination from the first constituent assembly. 14 States Legislative Assemblies also provide reservations for Anglo-Indians. The nomination for them has been scrapped by the 126th Amendment Bill, enacted as the 104th Amendment Act.
Article 331
Under Article 331, if the President holds the opinion that Anglo-Indians are not adequately represented in the House of the People, they can nominate two members. These nominees were chosen by the President on the recommendation of the Prime Minister. The President was not bound to use this power of nomination; its use rested on their discretion.
Article 333
Article 333 is a provision parallel to Article 331. It gives the governor the power to nominate Anglo-Indians to the state legislative assembly if they feel that the community is not adequately represented. This nomination shall not exceed one member.
Reasons for the Amendment
Around the time of independence, the number of Anglo-Indians was 3 lakh. According to the 2011 census, their numbers had dwindled to around 293. In the course of the parliamentary debates over the Bill, it was stated that the community has made ‘significant progress’ over time. It implied that this community had assimilated well and did not need special provisions for representation.
Criticism of the Amendment
According to a 2013 Ministry of Minority Affairs report, Anglo – Indians suffer from poor social and economic conditions. They face a lack of education, inadequate employment, the dearth of housing facilities and cultural erosion. Thus, they need reservations for uplifting their position in society.
The census data which was used to justify scrapping the nomination was called into question by various authorities including the All India Anglo-Indians Association. Member of Parliament Derek O’Brien talked at length about the fallacy of this data. The government data showed mere 9 Anglo-Indians living in West Bengal. Born to an Irish grandfather, and a resident of West Bengal, O’Brien said that there were more Anglo-Indians in his family itself. Even Obrien’s petition against the abolition of nomination had 750 signatures from Anglo-Indians at the time of the speech.
The 2011 data showed no Anglo-Indians in Uttar Pradesh and West Bengal, yet there were sitting Anglo-Indians nominated to the Uttarakhand and UP state assemblies. Thus, the number of Anglo-Indians in these states could not be zero. There were more Anglo-Indians in the country than the census data showed, not just in thousands but an estimate of about 3.5 lakhs.
O’Brien further said that Anglo-Indians were not a backward community and never have been. They are a small community with a big influence because we run the best schools in this country where lakhs and lakhs of people go. He talked at length about their achievements across arenas and insisted that the community deserves representation in the legislature too.
In the Rajya Sabha, Ram Gopal Yadav talked about the need for representatives of Anglo-Indians despite the small number. He warned against trivialization and ignorance of just two nominees, as governments can fall with just one vote. Shri Benny Behanan lamented that the government can not take care of a small minority community of mere lakhs, and thus it could not be expected to take care of the 20 crore minority population. Criticism against the move has also arisen because of the lack of grounds offered for the termination of nomination in the statement of object and reasons.
Provisions related to SCs and STs
Out of the total 543 seats for elected representatives in the Lok Sabha, 84 seats are reserved for Scheduled Castes and 47 for Scheduled Tribes. At the state level, there is a reservation of 614 SC MLAs and 554 ST MLAs out of a total of 4120 seats. This is in line with the 2011 Census that shows the number of SCs at 16.7% and STs at 8.6%. Scheduled Tribe communities are predominant in states like Maharashtra, Jharkhand, Madhya Pradesh, Chattisgarh, Orisa and the North- East.
Criticism
Shri KK Ragesh of the Rajya Sabha pointed out a glaring irony. Reservations for SCs and STs which received unanimous support in the Sabja did not exist in the very house that they were being discussed in. While Ragesh supported the Bill, he insisted that the ambit of reservation be extended to the upper house.
P Wilson of Tamil Nadu claimed that the Law Minister’s claim of ‘considerable progress’ was a fallacy. There was no data to support his claim. Honour killings, denial of access of Dalits to temples and untouchability are still a reality. Unless equality had been achieved, his claim was not just one.
MP Saronji Hembram from Orissa had similar qualms. She talked about the need to not settle at legislative reservations, but to extend them to promotions and the judiciary through an All India Judicial Service. Shri Vir Singh pointed out that various reserved seats were lying vacant and being eliminated gradually due to them being ‘sold out’ to the private sector. These inefficiencies and leaks need to be plugged in for effective implementation of the reservation programme.
TMC MP Derek O’ Brien too expressed his unwavering support for extending reservations for the SC and ST communities in India. However, he requested the government to extend reservations by more than just 10 years, but 20 or 30 instead.
Passage of the 126th Constitutional Amendment Bill
The procedure for passing this Bill is laid down under Article 368 of the Constitution. It requires fulfilment of three conditions to make a proposed amendment into a valid law-
At the time of voting, more than 50% of the total strength of the house must be present
Special majority, i.e., support of two-thirds present and voting members
Ratification by at least half of state legislatures
The Bill was introduced in the Lower House of the Parliament. It passed unanimously with 355 votes in favour and none against on 10th December 2019. On 12th December 2019, it made it to the upper house and passed unanimously again- with a 163 in assenting and no dissent.
Subsequently, on 20th December, 2019, a letter was sent to the state legislature councils and assemblies to request their ratification of the 126th Amendment. Since the Act was supposed to come into force on 25th January, it was also requested that a resolution ratifying the amendment be communicated latest by 10th January 2020. More than half of Indian states assented to the Bill. Finally, the 126th Amendment Bill 2019 received presidential assent on 21st January 2020 and became an Act.
Conclusion
Dr Ambedkar on 25th August 1949 said that “All those who have spoken for reservations to SCs and STs have been so meticulous that the thing should end by ten years. All I want to say to them in the words of Edmund Burke is that ‘large empires and small minds go ill together’.” At the time of enactment of the Constitution, reservations were only assured for 10 years. This echoes to the present day.
According to the then Minister of Social Justice and Empowerment, Shri Ravi Shankar Prasad. “Reservation is undoubtedly good and it should be going on further”. However, he simply followed the same playbook as previous amendments to Article 334 in not increasing the ambit of reservations or the system by more than 10 years.
As Shri Ram Villas Paswan said, “There are four revolutions – Cultural Revolution, Social Revolution, Economic Revolution and Political Revolution.” The political one was achieved at the making of the Constitution. The task at hand is to achieve all three. Reservations without corresponding social empowerment fall short of the Constitution’s vision of equality. There is a pressing need to do more, not just in the political, but also in the social, cultural and economic spheres.
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This article has been written by Ayush Tiwari, a student of Symbiosis Law School, NOIDA. In this article, the author has written briefly about the pure theory of law which was given by Hans Kelsen.
The pure theory of law is a broad theory of law that complies with legal positivism’s principles. Its technique is structural analysis, and its goal is to comprehend the law as it is, not as it should be. More precisely, it supplies us with a collection of core legal ideas to employ when seeking to comprehend and express the law in a scientific manner, such as ‘legal system,’ ‘norm,’ ‘right,’ ‘duty,’ ‘sanction,’ and ‘imputation.’ We may argue that Pure Theory’s goal is to create the theoretical groundwork for other legal disciplines like Contract Law, Constitutional Law, Legal History, Comparative Law, and so on.
Hans Kelsen, a renowned Austrian lawyer, and philosopher proposed the concept of Pure Theory of Law. At the turn of the twentieth century, Kelsen began his long career as a legal thinker. Traditional legal philosophies were hopelessly tainted, according to Kelsen, with political ideology and moralising on the one hand, and efforts to reduce the law to natural or social sciences on the other. Both of these reductionist initiatives were proven to be substantially defective by him. Instead, Kelsen proposed a ‘pure’ philosophy of law that avoided any reductionism.
Kelsen’s argument claims that when natural law contains aspects of politics, sociology, or other factors, there is no need to explain it. He felt that any potential of morality, sociology or any other factor should be removed from understanding the pure or natural law. As a result, the theory is known as the Pure Theory of Law.
A short note on Hans Kelsen : the propounder of Pure Theory of Law
Hans Kelsen was born in Prague in 1881 and was a law professor at Vienna University. He served as a judge in Austria’s Supreme Constitutional Court from 1920 to 1930. He afterwards relocated to England and, in 1940, to the United States, where he became a Professor of Law at many American universities. He lastly was an emeritus professor of political science at the University of California, where he developed his Pure Theory of Law in the Twentieth Century, which piqued international attention. Kelsen is the author of a number of books, including the Austrian Constitution (1920), General Theory of Law and State (1945), The Pure Theory of Law (1934) revised (1960), Principle of International Law (1952), What is Justice (1957), and others.
Kelsen has steadfastly rejected jurists’ efforts to widen the scope of jurisprudence to include the social sciences, and he has steadfastly campaigned for the separation of law from metaphysics, politics, and sociology.
Kelsen is noted for his most thorough positive law development. His pure law theory is founded on logic. It is normative in character and free of the influence of other knowledge of the world, particularly that of the social sciences. In the field of legal philosophy, Hans Kelsen’s views remain a significant point of reference. Kelsen’s impact may still be felt in fields including general theory of law, constitutional law, international law, philosophy of law, justice concerns, sociology, and politics.
Pure Theory of Law
A theory of law should be “pure,” that is, free of extra-legal influences of any type. As a result, Hans Kelsen believed in and promoted a theory that was free of any extra-legal aspects such as sociology, philosophy, ideology, psychology, politics, ethics, and so on. Kelsen quickly deduced that law belongs to the human sciences rather than the scientific sciences. According to Kelsen, the pure theory of law is so named because it exclusively describes the law and strives to exclude anything that isn’t precisely legal from the object of this description: Its goal is to free legal science of alien components. On the basis of two elements, Kelsen stated that his hypothesis is pure. For example, it distinguishes between law and fact. Second, it distinguishes between morals and law. Kelsen’s views go counter to the notion of precedents, which states that legal ideas emerge as a result of cases being decided. Kelsen’s pure legal theory does not represent the realities of real-world legal systems. Kelsen’s Pure Theory of Law aimed to purge law of all impure or foreign aspects, leaving material that is purely legal. From a legal standpoint, the law is a standard, not an actuality.
According to Kelsen, a “pure theory of law” is one that is entirely concerned with the part of knowledge that deals with law, including everything that does not technically belong to the subject matter of law. According to Kelsen, a theory of law must deal with the law as it is written, not as it should be. The philosophy of law, according to Kelsen, should be consistent. It ought to be appropriate at all times and in all locations. Kelsen’s idea has a wide range of ramifications. State, sovereignty, private and public law, legal personality, right and obligation, and international law are all covered.
Main principles under Pure Theory of Law
Law as a normative science
Law is a ‘normative science,’ according to Kelsen, yet legal norms can be separated from scientific norms. ‘Science,’ according to Kelsen, is a form of knowledge organised around logical principles. A norm, according to Kelsen, is a rule that prescribes a specific behaviour. He makes a distinction between legal and moral rules. He said that a moral standard just states “what a person should do or not do,” but a legal norm states that if a person violates the norm, he would be penalised by the state. Law is distinguished from politics, sociology, philosophy, and all other non-legal sciences, according to him. According to Kelsen, an appropriate theory of law must be pure, that is, logically self-contained and therefore not reliant on extra-legal values, natural law, or any other external source (such as the sociological, political, economic, or historical influence of law). The Command Theory of Austin is not accepted by Kelsen because it incorporates a psychological aspect into the concept of law, which Kelsen rejects. Kelsen proposes that the law be described as a Depsycholised command. Kelsen considers ‘sanction’ to be an important part of the law, but prefers to refer to it as ‘norm.’ Kelsen’s philosophy of law is devoid of any ethical or political ideals or judgments.
Grundnorm
Kelsen’s pure theory of law features a pyramidal hierarchy based on the grundnorm as the foundational norm. Grundnorm is a German term that means “fundamental norm.” He defines it as “the assumed ultimate rule by which the norms of this order are constituted and annulled, and their validity is received or lost.” The grundnorm establishes the content and verifies additional norms that are derived from it. But whence it gets its legitimacy was a question Kelsen refused to address, claiming it to be a metaphysical one. Kelsen suggested Grundnorm is a work of fiction and not a hypothesis.
According to Kelsen, unlike some of the other norms, the basic norm cannot be explained by referring to certain other or more validating laws. Instead, it may draw its legitimacy from the fact that it has been recognised, acknowledged, and accepted by a significant number of people inside the political unit. As a result, the law cannot be separated from the state’s organised structure and authority. Because this structure is normative, the concept of sanctions, which plays a rather unique role in Austinian doctrine as the element that makes law functional, depends on other forces such as prosecutors, officials, and judges to undertake their aspects of the normative structure before sanctions are activated and inflicted.
The Grundnorm is the beginning point for a legal system, and it is from this point that a legal system grows more complex and specialised as it evolves. This is a fluid situation. The grundnorm, which is self-contained, is at the summit of the pyramid. In a hierarchical structure, subordinate standards are governed by norms that are superior to them. The system of norms progresses from downwards to upwards and finally closes at grundnorm.
Hierarchy of Norms
A legal order, according to Kelsen, is made up of norms arranged in a hierarchical sequence, with one norm positioned above another and each norm getting its validity from the norm above it. The legal order is symbolised by the hierarchy, which takes the shape of a pyramid. As a result, the last level is the greatest norm, known as the fundamental norm or Grund Norm, emerges, which serves as the foundation for all future norms. The Grund norm is the cornerstone of Kelsen’s ideology. The Grund norm can be used to determine the legality or validity of any norm. The Grund norm’s validity cannot be objectively assessed. The Grund norm serves as a common reference point for the validity of the positive legal order, or all of the legal system’s norms. The Grund norm must be effective, that is, it must be followed by the general public. The validity of the Grund standard is referred to as efficacy.
Validity of Norms
The term “validity” refers to the existence of a given standard. It also refers to the fact that a norm is legally obligatory and that an individual must follow the norm’s instructions.
The following two postulates are stated by Kelsen:
Every two norms that derive their validity from the same fundamental standard are part of the same legal system.
The legitimacy of all legal norms in a particular legal system is ultimately derived from one basic standard.
The validity of another norm is the only explanation for a norm’s validity. When a single norm ceases to be effective, a legal order does not lose its validity, nor does a single norm lose its validity if it is just ineffectual from time to time. Effectiveness is a criterion for validity, but it is not a criterion for validity. The question of a norm’s validity comes before the question of its efficacy. A fact, i.e., a declaration that something is, cannot be used to determine why a standard is legitimate or why a person should behave in a specific manner; the reason for the correctness of a norm cannot be a fact.
While the traceability of a norm to an existing basic norm which determines its validity, efficacy refers to the norm’s effectiveness or enforcement. In other words, it examines if the rule is followed and whether violations are punished. If the response is affirmative, then the standard is effective. It isn’t otherwise. As a result, the principle of legitimacy is constrained by the principle of efficacy. Although inefficacy may not have an immediate impact on the validity of a norm, it may do so in the long run. For example, the system of norms may lack its validity if the overall legal order or the fundamental norm loses its efficacy.
In other words, they lose their validity not only when they are declared invalid by the Constitution, but also when the entire order is rendered ineffective. Norms must be accepted by a large number of people. As a result, validity entails higher-level legal approval and a minimum level of efficacy. ‘The legitimacy of every single standard of the order is contingent on the efficacy of the entire legal order.’ Each standard in the system depends on the validity of a higher norm.
Sanctions
Kelsen uses sanctions to emphasise the law’s coercive aspect. Because it brings a psychological aspect into a theory of law, Kelsen rejects Austin’s interpretation of sanction, which views it as a mandate from the Sovereign. As a result, he favours Grundnorm, which gives legislation legitimacy. Its authoritative character lends credibility to any legal system. The Grundnorm’s sanctioning authority makes it applicable to all other laws. According to Kelsen’s study of the sanctioned view of the law, legal norms are articulated in the form that if a person does not follow a certain ban, the courts must impose a punishment, whether criminal or civil.
Pure Theory of Law and its incorporation under the Indian legal system
The fact that the Constitution of India may very well be amended indicates that it is possible to deviate from the Constitution’s authority. If a constitutional clause is significantly changed, the laws that fall under it lose their legality. If a provision of the Constitution is repealed, the result will be the same. As a result, calling the Constitution the Grundnorm is incorrect. Given this background, the Grundnorm in India should be found in the “Basic Structure”. The “basic structure” of the Indian Constitution can be considered the rule of recognition or grundnorm, which is really the ultimate basis of a legal system since the legislation in the Constitution acquires legitimacy from the basic structure’s defined norms. The superiority of the Constitution, India as a sovereign, socialist, secular, democratic, republic as in the Preamble and a welfare state, the federal character of the Constitution, the unity and integrity of the country, separation of powers between the legislature, the executive, and the judiciary, and Part III of the Indian Constitution i.e. Fundamental Rights are some of the major features of the basic structure.
The notion of basic structure was highlighted in the case of Kesavananda Bharati v. the State of Kerala 1973. The term ‘basic structure’ refers to the area of the Constitution in which the parliament has no authority to make changes. It is the foundation of the ultimate recognition rule. This case supported the argument that any rule or norm validating authority is the basic structure. In Indira Gandhi v. Raj Narain (1975), the Supreme Court threw down clause 4 of Article 329-A, which was introduced by the 39th Amendment, on the grounds that it was outside the amending authority of the legislature since it was not in parlance with the Constitution’s “basic structure.” Furthermore, the Hon’ble Court decided in Minerva Mill & Ors. v. Union of India (1980) that the Constitution’s “Basic Structure” include the limited ability of Parliament to modify the Constitution, as well as maintaining harmony between Fundamental Rights and Directive Principles. Furthermore, amendments cannot alter the Constitution’s “Basic Structure.” As a result, the legal system of India closely resembles the framework of the legal system proposed by Kelsen in his “Pure Theory of Law.”
Kelsen’s criticism of Natural Law
Kelsen’s explanation of normativity is intertwined with his criticism of natural law theories, of which he feels his is the only viable alternative. According to Kelsen, there is no explicit idea of legal validity in natural law. Moral validity is the only idea of validity. Natural law theories, according to Kelsen, are conceptually confused: one is secular, while the other is religious. Natural Law is logically binding and self-evident, according to secular conceptions. According to religious views, these are divine instructions that must be obeyed by humans. The fundamental principle of the secular theory is that nature must be respected, whereas the fundamental principle of the religious theory is that God must be respected.
Another critique levelled towards Natural Law by Kelsen is that its theories are unscientific, and hence cannot be objectively proven. Kelsen’s idea aims to isolate what makes a law legal without having to consider morality. Kelsen establishes his theory by distinguishing between the “prescriptive” and “descriptive” elements of positive law. Kelsen dives deep into this idea in search of a “prescriptive” component, unlike Bentham and Austin, who tried to define how a legal system functions.
Kelsen’s views on International Law
International law, according to Kelsen, is a component of the legal system as a whole. As a single ultimate legal system, international law has been recognised. As a result, all national norms should be viewed as subservient to international legal order, the validity of which is defined by an international law basic norm. It is sufficient for international law to be presupposed by the basic rule of power. Grundnorm, it doesn’t need to exist. Kelsen was able to understand that the state is not an isolated entity and that it might have greater political allegiance by rejecting sovereignty. Kelsen’s principal goal in developing this theory was to build a generally accepted theory that could be applied to all legal systems. According to Kelsen, a legal standard should be recognised universally. It should serve as a benchmark for all legal systems. In terms of making his norm applicable to all legal systems, Kelsen dismisses the pluralistic approach and embraces a monist viewpoint.
Implications of Pure Theory of Law
No difference between Law and the State
Kelsen rejects the sovereign’s existence as a distinct entity. He also disputes the existence of the state as a separate entity from the law. In its ideal form, the state would be neither more nor lesser than the law, an object of normative juristic knowledge. A system of normative connections is referred to as a law. All legal personality is created artificially and derives its legitimacy from a higher standard. According to Kelsen, the idea of a person is nothing more than a phase in the concretization process. The most important aspect of Kelsen’s philosophy is that the state is regarded as a “system of human conduct and a compulsive order.” Kelsen further argued that because legislative, executive, and judicial systems all create norms, there is no distinction between them. For Kelsen, the distinction between procedural and substantive law is a matter of degree, with the procedure taking precedence. The state is, in actuality, a mechanism that regulates social behaviour in a normative order. However, only a judicial system can uncover such a scheme. In reality, law and state are the same things, and the distinction arises because we study them from two different perspectives.
No difference between public and private law
The contrast between public and private law is another important characteristic of the hierarchical organisation of law. According to Kelsen, because every law gets its force from the same Grundnorm, there is no distinction between public and private law. They cannot be distinguished on the basis that they safeguard various types of interests. In the public interest, private interests are preserved. He identifies this divergence as the result of a political philosophy that aims to “elevate public law and justice authoritarianism.”
No difference between Natural and legal personalities
Kelsen does not distinguish between natural and legal beings. There is no distinction between physical and legal beings. In law, he defines ‘personality’ as an individual who is able to bear rights and obligations. All legal personalities are fictitious and derive their validity from superior norms.
No Individual rights
Individual rights, according to Kelsen, do not exist in law. The ‘essence of law’ is legal obligations. Law is always a necessary system in a state. He believes that the notion of right is not fundamental to a legal system. A legal right is just a responsibility as regarded by the person who has the authority to demand that it should be fulfilled.
Criticisms of Pure Theory of Law
According to Australian lawyer Julius Stone, because the fundamental norm is evidently the most impure, the succeeding processes’ purity must imitate the lower norm’s originating impurity. Some also criticise the pure theory for separating natural law from law and excluding it.
Sir Lauterpacht, a former member of the United Nations’ International Law Commission and a judge of the International Court of Justice, believes that Kelsen’s theory of natural law allows for the precedence of international law above state law. According to American jurist Allen, sources of law such as custom, legislation, and precedent are co-ordinate and do not allow for an organisation in Kelsen’s hierarchical structure.
Friedmann’s objection is that Kelsen’s pure science of law is insufficient in terms of legal theory. Law is now overlapping areas that were formerly assigned to other social disciplines such as Economics, Psychology, and Sociology. Critics also argue that a single theory cannot rule over all of the world’s legal systems. Because each legal system has its unique set of laws and norms, the pure theory cannot be applied to all legal systems. Another issue is that an abstract man-made theory cannot determine the legal ramifications of a sudden change. It cannot contend with changing conditions and scenarios posed by the legislation because of its limited reach.
In terms of effectiveness, there is no such criterion by which minimal effectiveness can be determined. The notion is not viable in revolutionary conditions, according to critics. There is no criterion by which the minimal effectiveness of a legal system can be judged, and the efficacy of a legal system cannot be quantified by a theory. It left out the social issues of morality and fairness, both of which have a role in efficacy.
Conclusion
Kelsen gave the legal theory a new dimension by forcing us to consider the distinction, as well as the relationship, between fact and norm, between legislation and its normative impact. Kelsen proposed an internally consistent model of the judicial process that, in some ways, mirrors attorneys’ and legislators’ intuitive reasoning. It is standard legal logic to trace a law’s legality back to the constitution. The notion that valid laws constitute an internally coherent system of laws is also flawed. Unlike his predecessors, Kelsen’s approach recognised the laws of primitive communities as well as the international community as law. Kelsen’s theories are frequently criticised for their ideas and internal coherence. But, he has written the most enlightening account of the legal process of the century. Despite the fact that none of his special doctrines have received universal approval, some have made their way into general legal theory. His half-truths and obvious fallacies shaped the evolution of jurisprudential thought as well.
Critics may doubt his theory’s ability to describe legal systems as they currently exist. Some types of laws are difficult to account for using Kelsen’s concept of law as a standard with a punishment attached. Procedural and evidential laws, laws establishing organisations, laws awarding freedoms and rights, and laws cancelling other laws all fit into the pure theory uneasily. At this point in history, his arguments for the logical coherence of international and national legal regimes are unconvincing. Kelsen’s ideas of law have undeniably improved the subject of jurisprudence, despite being complicated and imprecise in several areas and receiving numerous critiques.
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Have you ever imagined why many salesmen/saleswomen in malls, big retail stores, showrooms, shops do not sit, or why there are no seating facilities in most of these shops for their workers?
The reason is that they are not “entitled” to have a seat, nor do they have a right to sit during their working hours even when there is no customer present in the shop. Due to the absence of any statutory provision and out of the fear of losing their jobs, they are often forced to work under these conditions. The issues related to working conditions in the shop and establishments are regulated by the Shop and Establishment Act in India.
In total there are 19 Shop and Establishment Acts that are presently in force in India. It is compulsory for every Shop and establishment to comply with the requirements of the Acts in order to run its business.
Scope of the Act
The scope of the act is very wide and the term “shop” includes any premises where goods and services are rendered to the customers(includes both retail shops and wholesale shops). For example- Jewellery shops, Book Shops, etc. Whereas the word “Commercial establishment” means any premises where any trade, business, profession, or any work is undertaken. For eg- Banks, restaurants, hotels, clubs, theatres, charitable trusts, etc. Hence, the Act is applicable to almost all commercial, recreational places and regulates the working conditions of workers in such premises. The definition of shops and establishments does not include the term “Factory” under the act.
Introduction to the Amendment in Tamil Nadu Shops and Establishment Act, 1947
The Tamil Nadu Assembly in September 2021, passed the amended Tamil Nadu Shops and Establishment Act, 1947, making it mandatory under Section 22-A to provide a seating Facility to the Salesman and working staff at the Shops, store-fronts, and commercial establishments.
Section 22 A of the Act states that “The premises of every establishment shall have suitable seating arrangements for all workers so that they may take advantage of any opportunity to sit which may occur in the course of their work and thereby avoid ‘on their toes’ situation throughout the working hours.” Now, it will be mandatory for the Traders/Owners of the shops and commercial establishments to provide seating facilities to their staff during the working hours and they cannot force their staff and workers to stand for long hours, or when there is no customer in shops.
It is pertinent to mention here that the said amendment in the Tamil Nadu Shops and Establishment Act, 1947 was inspired by a similar previous Amendment of 2018 in Kerala’s Shop and Establishment Act namely The Kerala Shops & Commercial Establishments Act, 1960.
Unlike Tamil Nadu, the road to the above-mentioned amendment was not easy in the case of Kerala, but it was a result of regular protest by the workers in shops and commercial establishments and organisations since 2010. The lady behind this struggle is Mrs. Palithodi Viji, a textile worker from Kerala, who began the protest against the working conditions in the Textile Industry in 2007 when her employer refused her request to use the toilet. There was no toilet facility in the shops and the women workers had to use the toilets inside the nearby malls. To tackle such situations, Mrs. Palithodi Viji founded women workers groups like “Penkottu ” and later “Asanghaditha Mekhela Thozhilali Union” (Workers Union of Unorganised Sector) and staged several protests across the state.
The struggle for ‘right to sit” grew intense in 2012, when the salary of a Saleswoman was cut by a textile unit in Kozhikode(Kerala) for leaning against the wall when a group of customers were shopping in the showroom. The protest received support from workers across the State and received national attention in 2016, when the National Human Rights Commission(NHRC) pressurised the Kerala Government to submit a report on this issue and also directed the Kerala Government to take necessary steps in this regard. As a result, the Kerala Government amended the Kerala Shops & Commercial Establishments Act, 1960 in December 2018, guaranteeing a more secure environment for working women and preventing their sexual exploitation in the workplace.
Highlights of Kerala Amendment Bill, 2018
The draft Bill brought out by the Kerala Government in 2017, proposing amendments to the 1960 Act, included several provisions that shop owners are bound to make for the safety of women workers. It also included other women-friendly initiatives, including providing seating arrangements for saleswomen during working hours as well as arrangements to ensure women’s safety during night shifts.
As per the amended Section 20 of the Act, an employer can now employ any women worker between 9 P.M and 6 A.M only after obtaining the consent of the women worker. The Employer needs to ensure that in a group working between 9 P.M and 6 A.M, adequate no. of women are part of that group. The employer is under an obligation to make a proper arrangement with respect to the prevention of women from sexual harassment and also for providing transport facilities to all such women from the shop or establishment to their house.
The newly introduced Section 21B in Kerala Shop and establishment Act mandates that in every shop and establishment, suitable arrangements for sitting shall be provided for all workers so as to avoid ‘on the toes’ situation throughout the duty time, so that they may take advantage of any opportunity to sit which may occur during the course of their work.
Denial of Rights
It is very unfortunate that even after 74 years of Independence, we as a nation have failed to recognise the “Right to Sit” and other basic rights like toilet facilities, the safety of women workers in the Workplace as a basic right and there is still a need for an amendment to make this mandatory during working hours. We often see that in Malls, shops, the Salespersons are not provided with chairs and they have to stand for 10-12 hours daily throughout their working hours. These workers are not allowed to sit even when there are no customers in the shops, which has no direct or remote relation with their performance. These workers are not allowed to sit or even take toilet breaks, and due to such pathetic working conditions, many workers develop serious health issues like- kidney-related issues, varicose veins, swollen feet, and back pain.
Response of the Traders on the Amendment
While the Workers, Media and NGOs appreciated the Bill, the Traders as expected and evident were unhappy with this Amendment. According to the Traders, this amendment will not only make the workers less active and less efficient but it will also bring down the business. There is no doubt that there is no merit in these arguments and it shows how Traders focus only on their profit, even if it comes at the cost of their worker’s physical and mental health.
Strict punishments violation of this rule will bring the required changes in the working environment in Shops and Commercial Establishments, which is only possible by regular inspection of these Shops and Commercial Establishments by the concerned Officers and also taking necessary and timely actions on the complaints received against the Employer/Traders by the Workers and also by the Customers.
Amendments in other States so far
It is very disappointing that so far only Kerala and Tamil Nadu Government have introduced the “right to sit” through amendment in their respective local Shops and Establishment Acts, but other states have taken no such steps in this direction even though the situation is similar in almost every state like- No seating facility, no fixed working hours, no weekly off, no toilets in the shops.
As the Shops and Establishment Acts are state-specific acts, it will be a great step if other states can also appreciate/adopt the steps taken by Kerala and Tamil Nadu Government and amend their respective Shop and Establishment acts in order to ensure more humanly treatment to the workers by the Owners of the shops and establishments in the unorganised sectors.
As per the Directive Principle of State Policy (DPSPs) under Article 42 of the Constitution of India, the State Governments are under an obligation to make provisions/ Policies for Just and Humane conditions at Workplace for the workers in the unorganised sectors.
The Amendment by State Governments in their existing respective Shops and Establishment Acts can ensure the safe and secure work environment in the workplace which falls under the definition of term “Shops” and “Commercial establishments”, where the workers are forced to work under the inhuman conditions at the cost of their physical and mental health due to lack of any statutory provision in this regard.
Conclusion
The amendment in the Act is a historical win for the underprivileged women workers and it will provide the much-required relief, respect and dignity to all the workers. This amendment is definitely not an end to all the problems of workers but it will encourage more workers to raise their voice against the injustice they face in daily life from their employers.
For the time being, we must congratulate Mrs. Palithodi Viji and Kerala’s Women Workers for their long and relentless struggle which forced the Kerala Government to amend its Shops and Establishment Act. We must appreciate the Tamil Nadu Government for appreciating and adopting this amendment in their state which also proves the commitment of the Government towards the “proletariat” class. These amendments have paved the way for the Workers in other States to demand similar amendments from their State Governments in the future. This historical victory also establishes the fact that a dedicated movement for a social cause can force the Governments to discharge their duties mentioned under the Constitution of India.
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This article is written by Ms. Kishita Gupta from the United world School of Law, Karnavati University, Gandhinagar. This article talks about the theories of rights along with an overview of Hohfeld’s analysis of rights.
Table of Contents
Introduction
The term that appears most frequently in legal discourse is ‘right’, but it proves to be the most elusive in terms of its meaning. The law is a right established by an authority above the party whose purpose is to arbitrate between diverse claims and harmonise them as a whole, whereas a right is typically defined as what a man considers to be a right from his point of view. In this article, the author has briefly discussed the analysis of rights by the eminent jurist Hohfeld. In the later stage of the article, the will theory and the interest theory are also discussed briefly.
About Hohfeld – a biographical note
Wesley Newcomb Hohfeld was born in California in 1879 and died in 1918. He graduated from the University of California and then became the editor of the Harvard Law Review while at Harvard Law School, where he graduated in 1904. Hohfeld taught at Stanford Law School for a short time before moving to Yale Law School, where he remained until he died in 1918.
“Fundamental Legal Conceptions as Applied in Judicial Reasoning and Other Legal Essays” was his seminal work (1919). The book, together with two pieces published in the Yale Law Journal in 1913 and 1917, encapsulates the majority of Hohfeld’s jurisprudence.
Hohfeld’s analysis continues to be a significant contribution to our current understanding of the nature of rights. A chair at Yale University is named after Hohfeld to honour his enduring importance. Hohfeld’s theories are still relevant today, even after a century has passed since his death and traces of his theories are also evident in the Indian legal justice system.
A primer to Hohfeld’s analysis
A ‘right’, according to Hohfeld, is a legal interest that imposes a correlative duty. “If X has a right against Y to keep off the latter’s land, the correlative (and equivalent) is that Y has an obligation toward X to stay off the place”, Hohfeld says. In the same way that a ‘privilege’ imposes a comparable and correlative no-right, power imposes a correlative liability and immunity, resulting in handicap. The contrast between a right and a privilege is particularly important in this regard.
He points out that the term ‘right’ was frequently used to refer to a variety of other legal interests such as powers, privileges, and immunities. This issue was so common that Hohfeld was able to obtain enough court support in his article to acknowledge it. As a solution, Hohfeld proposes separating rights, privileges, powers, and immunities, all of which he considers to be separate legal interests. Surprisingly, he tries to make this distinction based on the legal duties that these interests place on another organisation. Hohfeld’s definition methodology is based on the usage of correlatives and opposites.
Because the most fundamental legal relationships are sui generis, attempts at formal definition are inevitably unsatisfying, if not completely futile. As a result, the most promising course of action appears to be to display all of the numerous relations in a scheme of ‘opposites’ and ‘correlatives’, and then to demonstrate their unique breadth and application in real examples.
Hofeld’s analysis is majorly based on Salmond’s earlier system. According to Salmond, there are three categories of rights:
Rights in the strict sense, which are defined as interests protected by the law by imposing its duties with respect to the rights upon other persons,
Liberties are defined as “interests of unrestrained activity”,
Powers “when the law actively assists me in making my will effective”.
Jural relations
Hohfeld’s dissatisfaction with the premise that all legal relations may be reduced to rights and duties led to the eight fundamental legal concepts. This was identified as the most significant impediment to understanding and successful resolution of legal challenges. His notion of jural relations can be explained through the below-mentioned table:
Image Source: Ivana Tucak, Rethinking Hohfeld’s Analysis of Legal Rights, 25 PRAVNI Vjesnik 31 (2009).
The vertical arrows connect jural correlatives, or ‘two legal positions that entail each other,’ whereas the diagonal arrows connect jural opposites, or ‘two legal positions that deny each other.’
Rights and duties
Hohfeld did not devote much attention to the relationship between rights and duties. According to him, the term ‘rights’ is mistakenly applied to something that may be a privilege, a power, or immunity in some cases, but is not a right in the strictest sense. The correlative (and equivalent) ‘obligation’ provides a method for limiting the word ‘right’ to its specific and most appropriate meaning. Legal rights are always accompanied by legal obligations. This pair of phrases convey the same legal relationship but from two different perspectives. Hohfeld used the example of X having a right against Y to keep off of X’s land. The invariable corollary of this is that Y has a duty to X to keep off X’s territory. According to Hohfeld, the word ‘claim’ is the most accurate and adequate synonym for the word ‘right’ in terms of meaning. If necessary, state coercion is used to enforce a valid right or claim.
Being granted or having a legal right (or a claim, according to Hohfeld) entails legal protection from other people’s interference or refusal to provide aid or recompense in connection with a certain action or state of things. A person who is supposed to refrain from interfering or give aid or remuneration has a responsibility to do so. A legal position deriving from the imposition of responsibility on someone else is known as a right or claim.
Privileges and no-rights
The term liberty is preferred by the majority of future jurists over the phrase privilege. These two terms occupy the same structural position in Hohfeld’s theory, notwithstanding Hohfeld’s preference for the term privilege. Privileges are permissions to act in a given way without being held liable for the harm caused to others who, at the same time, are unable to ask the authorities to intervene. “To the degree that the defendants have privileges, the plaintiffs have no rights”, Hohfeld said. There can’t be a conflict between rights (claims) and privilege. The correlation of this legal relationship demonstrates that the person against whom liberty is asserted has no right to the conduct to which liberty pertains. This does not, however, rule out the possibility of him interfering with the action.
Hohfeld agreed that under legal systems, liberties that are not accompanied by responsibilities imposed on others to avoid interference with legal action exist, and that there are often strong political reasons for doing so. When someone is granted legal liberty, he relieves legislators of the burden of imposing a duty on others. When deciding whether or not to apply the above requirements in a specific circumstance, a rational legislator may take advantage of political concerns.
For example, the fundamental rights mentioned in Part III of the Indian Constitution, are in fact the ‘privileges’ mentioned by Hohfeld as they provide that the State has a correlative ‘no-right’ to interfere in the exercise of these freedoms.
Powers and liabilities
The first two pairs of legal positions (right/duty and liberty/no-right) are first-order relations, while the following two pairs (power/liability and immunity/disability) are second-order relations. Some first-order relations are directly applied to human behaviour and social interactions without the use of any second-order relations. All second-order relations, on the other hand, are applied directly to human entitlements and only indirectly to human behaviour and social interactions.
According to Hohfeld, a jural relationship can be modified in two ways: by facts that are not under the volitional control of one or more people, or by facts that are under the volitional control of human beings. He defined powers in terms of the second group of circumstances, in which a person with the dominant volitional control has the legal authority to change jural relations in a specific way. This relationship is held between two people with respect to certain actions or conditions of events, similar to other jural interactions. Hohfeld gave several instances of legal powers, including property-related powers (property abandonment and ability to transfer property), contractual obligation-creating capabilities, and the establishment of an agency relationship. Susceptibility to someone exercising power is defined as liability. Deference to a shift in a person’s entitlement isn’t always unpleasant. A promisee, like an inheritor, may profit from an entitlement conferred by a promisor.
When it comes to liability, Hohfeld brought up the issue of those who work in ‘public callings’ like innkeepers. Rather than the common perception that innkeepers have a duty to all other parties, Hohfeld stressed that an innkeeper has liability and that travellers have a correlative authority. As a result, travellers have the legal authority to bind an innkeeper to accept them as guests by submitting an acceptable tender. If jurists conflated Hohfeldian powers with rights, there would be a lot of uproars. Simmonds gives an example of how power can be linked with a duty not to exercise it, such as when a nonowner has the authority to transfer title to a bona fide purchaser but will commit an infraction while doing so. If we use the word ‘right’ to define the power, we must declare that the non-owner has the right to sell the property.
Immunity and disability
Immunity refers to the state of not being able to have one’s rights altered by another. A lack of power to change legal entitlements is defined as a disability. The basic difference between powers and immunities is the same as the general contrast between rights and privileges. A right is an affirmative claim against someone else, whereas a privilege is someone’s exemption from someone else’s right claim. Similarly, power is someone’s affirmative control over a specific jural relation about another, whereas immunity is someone’s independence from another’s legal power or control over some jural relations.
For example, if A enjoys immunity against B, B is limited in his or her ability to exercise powers relating to the immunity’s covered entitlements. Immunity rights are a common occurrence in constitutional texts. As a result, if the people are guaranteed freedom of speech by the Constitution, the legislature cannot wield any power in this regard. While the legislature is disabled, the people have immunity rights to freedom of speech.
Criticism of Hohfield’s theory of rights
W. N. Hohfeld’s legal rights analysis has been lauded as a model of conceptual clarity and rigour that everyone interested in the nature of legal rights and liberties should study. Hohfeld illustrates how numerous conceptions usually referred to as legal rights are related, providing a useful tool for comprehending conversation that uses legal rights terminology. However, despite the fact that numerous legal philosophers have praised and commended Hohfeld’s analysis, it has not been included. The ambiguity that Hohfeld intended to clarify still exists today, and hence, his analysis can be utilised to improve the quality of legal discourse by preventing judges and other lawyers from making conceptual errors that they would otherwise make.
The common conflation of rights and liberties can lead to erroneous inferences and conceptual mistakes in the law. For example, if one believes that the right to free speech is a right (in the strict sense) when it is actually liberty, one will incorrectly believe that others have noninterference duties that are correlative to this ‘right.’ This is one of the clearest examples of liberty that is not secured by equivalent obligations, according to Glanville Williams. Surely, he claims, no one owes him a duty to help him with his speech, to provide a platform for him to talk from, or to maintain silence while I speak. The responsibilities that may be attributed to him as a result of his ‘right’ to free speech have nothing to do with it. Persons must, of course, refrain from gagging him or removing him from the podium while he was speaking.
These obligations, however, are not related to the ‘right’ to free speech, according to Williams, but are merely part of the standard responsibility not to commit a battery. As a result, no duties are owed to an individual who exercises his ‘right’ to free speech that is not already assigned to him under his other rights. As a result, Williams contends that describing freedom of expression as a legal right is incorrect: it is only legal liberty.
The requirement of two people for Hohfeldian analysis of rights
As previously stated Hohfeld owned all rights to be relations between two distinct individuals. As a result, as per his analysis, there is no such thing as a “right to bodily integrity”. Rather, one person (“X”) has a claim-right to a certain content against another person (“Y”) (insofar as this is, in part, a claim-right). As the indefinite article suggests, there are as many rights as there are individual people who hold them multiplied by the number of individual people who hold them against whom they are held. That’s a lot of privileges.
Hohfeld’s only concession to ordinary thought’s conflation of these rights into one is to recommend that rights of similar substance that one person holds against many persons be referred to as “paucital rights”, and rights of similar content that one holds against all people as “multital rights” (Hohfeld suggested that a right be dubbed an “unital right” if it has no similarly contented cousins). However, these are essentially categories of rights based on their content relationships with other rights; notwithstanding these classifications, Hohfeld’s basic atomic rights exist exclusively between two individuals.
Hohfeld’s Primary Correlativity Claim
The two correlativity arguments made by Hohfeld are crucial to his rights analysis. While the focus of the main criticism of Hohfeld is on the following section on his secondary correlativity thesis (that the correlative of an active right is only the absence of a passive right in another), others have questioned whether Hohfeld’s primary correlativity claim (that the correlative of every passive right is a duty on the part of others to perform the act that is the content of the passive right) is true. This more radical critique of correlativity takes two forms. One approach is to deny the universality of rights/duties correlativity in all viable moral theories, and consequently the necessity of it.
Functions of right – Will theory and Interest theory
In jurisprudence, there are two main theories of the function of rights:
The will theory, and
The interest theory.
Will theory
H.L.A Hart is said to have founded the concept of the will theory of rights, which is also known as choice theory. Will theorists argue that having a right makes you a ‘small-scale sovereign’? A will theorist, for example, claims that the purpose of a right is to give its possessor power over another’s responsibility. The will theorist claims that your property right, depicted in the diagram above, is a right since it includes the ability to waive (or cancel, or transfer) the duties of others. You have ‘sovereignty’ over your computer, which means you have the option of allowing others to touch it or not. A promisee is similarly ‘sovereign’ over the promisor’s actions: a promisee has a right because he can waive (or annul) the promisor’s obligation to maintain the promise.
Criticism of the will theory
While jurists such as Kant, Hegel & Hume supported this theory, it was fairly criticised by Duguit. According to him, the law is based on an objective will rather than a subjective will. The law’s goal is to protect only those acts that contribute to social cohesion. He went on to say that the concept of subjective right is a metaphysical construct.
Interest theory
However, the theorists of interest theory disagree. The function of a right, according to interest theorists, is to serve the right interests. According to the interest theorist, an owner has a right not because he or she has a choice, but because possession benefits the owner. The promisees have a right because they have an interest in the promise’s fulfilment or (alternatively) in the ability to make voluntary ties with others. Your rights, according to the interest theorist, are the Hohfeldian happenings that are beneficial to you. Jeremy Bentham is known to have initiated the interest in the theory of rights.
Criticism of the interest theory
Salmond criticised the interest theory, claiming that the state does not protect the interest. It is necessary for the state to safeguard and recognise an interest in order to grant a legal right. While Gay claims that this approach is partially valid because a legal right is not an interest in and of itself, but rather serves to defend an individual’s interests. He also claimed that legal rights impart the right to do a certain act/to refrain on a person by imposing a legal duty on them through the ‘state’s’ legal agency. On the other hand, Dr Allen viewed that it might be claimed that neither theory is opposed to the other; rather, it is a synthesis of the two. He attempted to reconcile these two views by pointing out that the core of legal right appears to be the legally guaranteed power to realise an interest, rather than legally guaranteed power in and of itself. Both views, it might be stated, are necessary components of the legal right.
Analysis of the functions of right
Each rights theory, including interest and will, has three features:
An ultimate purpose that all rights (or at least those covered by the particular version of the theory) purport to serve;
Means of protecting or effecting that purpose, such as imposing duties on other parties, including enforcement mechanisms, and so on;
Specifying which candidates constitute rights, i.e., which types of normative positions (e.g., Hohfeldian claims, liberties, and so on).
Conclusion
Hohfeld not only corrected small technical errors but also provided a significant critique of the past legal rights and liberties notions. Finally, there is the issue of Hohfeld’s scheme’s utility. The debate over Hohfeld’s scheme of jural relations has proven to be one of the most complicated in legal analytical history. The process of assessing its utility and relevance is still in progress. Hohfeld had analysed the fundamental grounds of our legal theories and institutions, as well as the foundations of our rights theories, when developing his analytical approach. Hohfeld’s study entailed a detailed and an in-depth analysis in which he attempted to reflect people’s genuine beliefs about rights. As a result, Hohfeld’s analysis is of essential practical significance, despite its analytical nature. As he points out, appropriate analysis is required for proper practical application, and “the deeper the study, the greater one’s understanding of the law’s wholeness and harmony”.
References
Hohfeldian Analysis — Application of, by the Indian Judiciary : A Lawyer’s Perspective (2012) 10 SCC J-17
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This article is written by Athira R Nair, a student of the School of Law, Christ University, Bangalore. This article consists of an overview of will, gift deed, relinquishment deed and their transferability.
Table of Contents
Introduction
Estate planning refers to the process by which one disposes of their personal assets to their loved ones whereas succession planning refers to the process by which one identifies and chooses a reliable successor. They both facilitate the transfer of a person’s wealth and assets in an orderly manner so as to avoid any potential confusion that may lead to family feuds or legal complications in the future. The wills, gift deeds, and relinquishment deeds aid the process of succession and estate planning.
This article aims to shed light on these instruments of succession and estate planning and distinguish the differences between them.
What is a will : an overview
According to Section 2(h) of the Indian Succession Act (1925), a ‘will’ is a legal declaration of a testator’s intent regarding the transfer of ownership of their property upon their demise. So, a will is essentially any legal document stating the legal means by which a person desires to dispose of their assets and wealth in the event of their death. It is also called a testament. This document usually contains all the testator’s dispositions in writing. However, there are oral wills as well. They are referred to as nuncupative wills and are legal only in certain jurisdictions. A will comes into effect only after the demise of the testator. They are the most common instruments for succession and estate planning in India. A person is said to have died intestate if they did not leave any instructions regarding the disposal of their property and have no will at the time of their demise. This usually happens in cases involving the death of young people. In such situations, the property of the deceased is distributed as per the law.
Essential elements of a will
For a will to be valid, there are certain essential characteristics they should possess. These include the following:
Legal declaration
All the documents related to the will ought to be in conformity with the law. Furthermore, the executor of the will should be legally competent to execute it.
Intent
The intent of a will should be expressly declared as the transfer of ownership of the testator’s property. Without this, the will is not binding or executable.
Property disposition
The will should be made to facilitate the transfer of the testator’s wealth and assets to the people of his choice.
Effect after death
A will is executable only after the death of the testator. Till then, the testator exercises complete ownership over the property and may amend the will at any time as per their convenience. A will is executed after the testator’s demise by their executor after an application to obtain a letter of administration is filed before the court.
Types of wills
Privileged wills
Section 65 of the Indian Succession Act (1925) deals with privileged wills. They are essentially written or oral wills made by soldiers, airmen, or mariners who have completed eighteen years of age that mention the manner in which they desire to dispose of their property.
The execution of these wills is governed by certain rules which are mentioned in Section 66 of the Indian Succession Act (1925). This Section, inter alia provides for the validity of unfinished wills and even wills which the soldier, airman, or mariner instructed to prepare but died before the execution. The privileges enacted in these provisions are to compensate for the predicaments faced by soldiers, airmen, and mariners during the tenure of their service.
Unprivileged wills
Unprivileged wills refer to those wills that are created by any person who is not an airman employed in an expedition, a mariner at sea, or a soldier who is engaged in actual warfare. Section 63 of the Indian Succession Act (1925) deals with the execution of unprivileged wills. Unprivileged wills are valid only if the testator signs or makes another person sign the will in their presence with the intention to give effect to its writing and there are at least two witnesses present to attest the will who observed it while it was being created either by the testator or on their instruction.
Contingent wills
Contingent wills refer to those wills that can be executed depending on the happening of a future event or upon the satisfaction of certain conditions. Owing to this, they are also called conditional wills. These wills are invalid in situations wherein the contingency fails to occur or the conditions are not fulfilled. The wills involving conditions that are opposed to law or invalid in nature cannot be executed either.
Joint wills
Joint wills refer to testamentary documents wherein two or more people agree to make a conjoint will. They cannot be revoked by one of the testators without the consent of the other testators if they are alive. Such wills are usually made by married people who intend to leave their property to their spouse upon their demise. Joint wills are not enforceable during the lifetime of any of the testators if they were meant to take effect only after the death of all the testators.
Mutual wills
Mutual wills refer to wills wherein two people consent to certain terms and conditions that are mutually beneficial to both parties. In situations involving these wills which have reciprocal benefits, the testator gives the other person the status of their legatee. These wills are binding on the surviving parties even after the death of any party. Mutual wills are usually created by married couples with children from previous marriages so as to ensure that the children get the property they are entitled to and it is not inherited by any potential future spouses instead.
Concurrent wills
Concurrent wills refer to co-existing wills written by a testator which contain instructions regarding their property disposal. Instead of having a single will, the testator chooses to make different wills as it reduces the complications associated with the disposal of different kinds of property, for instance, movable property, immovable property or property they own in different geographical locations. A concurrent will makes the process of property transfer more convenient for the testator.
Duplicate wills
Duplicate wills refer to wills that have two copies but are considered to be a single will. According to Section 63 of the Indian Succession Act (1925), in order to make a duplicate will, a testator has to make a copy of their original will, sign it, and get it attested. Duplicate wills are made as a safe backup to rely on in the event that something happens to the original will. The testator keeps a copy with them and gives the other to a trustworthy person like their executor, attorney, or in certain cases keeps it in a bank locker. A duplicate will is authentic and executable only when the original will is not on record. In circumstances wherein the testator willfully destroys the original, the duplicate will is revoked automatically.
Holograph wills
Holograph wills refer to wills written by the testators themselves. Provided there are no suspicious circumstances, these wills have their own merit and can be executed with ease owing to the fact that the testator has handwritten the entire will on their own.
Sham wills
Wills that are not created for the sole purpose of disposing of a testator’s property but have another ulterior motive are referred to as sham wills. The ulterior purpose these wills aim to fulfill is usually unethical. For instance, immoral acts like deceiving someone or acquiring property that the claimant is not entitled to constitute sham wills. Since a will is invalid if the testator does not consent to it, these wills are invalid. Section 61 of the Indian Succession Act (1925) states that all wills that are made through fraudulent means or under coercion that deprive the testator of their free-agency will be considered invalid.
Making of a will
In India, anyone over the age of 21 years is eligible to make a will. That said, there are certain prerequisites one should consider while doing so. Mentioned below are a few points to be factored in the making of a will.
Form
The will can be made on either plain paper or stamp paper. Though the latter is preferred, it is not a necessity as per the law. All testators are advised to write their own wills as opposed to getting someone else to write it for them or printing it as this facilitates verification in case any question regarding the validity of the will arises.
Necessity
Though it is considered a taboo in India, people ought to make wills at the earliest to avoid any future altercations between family members regarding property distribution. In situations wherein a person passes away without a will, then their property is distributed as per the laws of inheritance and succession which differ based on the religion the person followed. In the case of Hindus, the Hindu Succession (Amendment) Act (2005), is followed, Christians follow the provisions under the Indian Succession Act (1925), and the property of Muslims is distributed as per the Holy Quran.
Constituents of a will
Though there is no official prescribed format of a will, there are several essential constituents that are required for a will to be valid and legally enforceable. Mentioned below are certain parts of a will that can be used as a reference format.
Declaration
At the very beginning of the will, the testator is to declare that they are making this will of their own accord and are in their complete senses while doing so. The testator has to clearly state that they are under no pressure or coercion from any third party. The testator should also clearly mention their name, address, date of birth, and the like to prove that they are not under any influence at the time of making this declaration.
Details of property and documents
The testator should list out all their assets alongside the current market value of those assets. Every detail regarding their assets and any other items they own should be mentioned. For instance, the current location of the assets, documents stating ownership of the assets, and the like. Assets include valuables like the testator’s property, house, bank accounts, mutual funds, and other investments. The future location of the will, the procedure to execute the will, details of the executor, and the like should also be mentioned in the will and communicated to both the family members of the testator and the executor.
Details of ownership
The testator has to mention who the future owner of their assets will be with clarity. All their assets should be stated alongside the name of the future owner and the proportion they are going to own. This will avoid any confusion and future altercations between the beneficiaries. In case the testator wishes to leave some property for a beneficiary who happens to be a minor, then they have to appoint a trustworthy custodian of the assets till the beneficiary attains the age of majority.
Signing the will
After the testator has completed writing the will, they must sign it in the presence of a minimum of two witnesses who will also have to sign thereafter declaring their presence at the time of the testator’s signature. The witnesses will have to sign every single page of the will. The bottom of the will should indicate the date and place in which it was made. After all of the formalities are completed and the will is made, it should be placed in a sealed envelope containing the testator’s signature and date of sealing.
Registration of a will
According to Section 18 of the Registration Act (1908), the registration of a will is not compulsory. Though it is highly recommended to register a will in order to ensure its safety, unregistered wills are valid and executable too. In the case of Narain Singh v. Kamta Devi (1953), it was held that a will cannot be deemed ingenuine simply on account of non-registration.
Revocation of a will
All wills are ambulatory. This means that a testator may revoke or change it at any time before their demise, provided they are competent to do so. A will is said to be revoked when the testator takes some action to indicate that they do not want the provisions of the will to be legally binding anymore and their decision is lawful. A revocation is lawful only when the intention of the testator is clear. It may be either express intent or implied but the act of revocation must be consistent with the intent.
A document called codicil is used by testators to revoke a will. It can be used to partly or wholly amend a will too. A testator may also revoke their initial will by making a new one as a new will indicates a testator’s intent to revoke their earlier will, as observed in Kuppuswami Raja and Anr. v. Perumal Raja and Ors. (1963). Additionally, any statement made by the testator around the time they destroy a will, for instance by burning or tearing it will be considered as a demonstration of their intent to revoke the will. These are situations wherein a will is revoked intentionally. There are certain instances wherein a will is revoked unintentionally. For instance, in the case of a divorce, if the testator does not revise their will, any disposition to their former spouse is revoked automatically.
I, ______________, son of Shri _______________, aged __ years, resident of _____________________________, do hereby revoke all my former Wills, Codicils and Testamentary dispositions made by me. I declare this to be my last Will and Testament.
I maintain good health, and possess a sound mind. This Will is made by me of my own independent decision and free volition. Have not be influenced, cajoled or coerced in any manner whatsoever.
I hereby appoint my ________________, as the sole Executor of this WILL.
The name of my wife is _________________. We have two children namely, (1) __________________ (2) ________________, I own following immovable and movable assets.
1. One Flat No.___ in _______________________.
2. Jewellery, ornaments, cash, National Saving Certificate, Public Provident Fund, shares in various companies, cash in hand and also with certain banks.
All the assets owned by me are self-acquired properties. No one else has any right, title, interest, claim or demand whatsoever on these assets or properties. I have full right, absolute power and complete authority on these assets, or in any other property which may be substituted in their place or places which may be Acquired or received by me hereafter.
I hereby give, devise and bequeath all my properties, whether movable or immovable, whatsoever and wheresoever to my wife, _____________________, absolutely forever.
IN WITNESS WHEREOF I have hereunto set my hands on this ____ day of ____, 20__ at ____________.
TESTATRIX
SIGNED by the above named Testatrix as his last WILL and Testament in our presence, who appear to have perfectly understood & approved the contents in the presence of both of us presents, at the same time who in his presence and in the presence of each other have hereunto subscribed our names as Witnesses.
WITNESSES :
1.
2.
Gift deed : an overview
As per Section 122 of the Transfer of Property Act (1882), a ‘gift’ refers to the voluntary transfer of some existing property made without consideration. A gift deed is a legal document used for this purpose. The property in question here can be moveable or immoveable. It should mandatorily be existing, transferable, and tangible. The person transferring the property is called the donor whereas the person receiving the property is called the donee. The property may be accepted by the donee themself or even by some other person on their behalf. The transfer of a gift from a donor to the donee is valid only when the donee accepts it during the donor’s lifetime. The offer of transfer ceases to exist upon the donor’s demise if the donee has failed to accept it till then. Once a donee accepts and registers a gift deed, the donor cannot revoke or cancel the same.
According to Section 124 of the Transfer of Property Act (1882), a gift deed is valid only when the property being transferred already exists. Gift deeds regarding the transfer of future property are void. A gift deed is an unconditional transfer and does not involve any consideration whatsoever. It is a gratuitous offer made from love. The donee of a gift can be a minor too. Gift deeds are an exception to Section 11 of the Indian Contract Act (1872) which deals with competency to contract and states that contracts entered into by minors are void as they lack the capacity to contract. Furthermore, the donee of a gift can be an unborn person too. In such situations, the gift can be accepted by someone else on behalf of the donee.
Essential elements of a gift deed
For a gift deed to be valid, there are certain essential characteristics it should possess. They include:
Transfer of ownership
The ownership of the property shifts from the donor to the donee as and when the property is transferred. In the case of conditional gifts, the transfer of property is made without any consideration but there are certain conditions that have to be adhered to. These conditions have to be in accordance with the provisions of the Transfer of Property Act (1882). In case any of these conditions are not fulfilled, then the ownership does not shift to the donee.
Existing property
The property being transferred to the donee should be existent. It may be either moveable or immoveable property. A donor cannot gift a future property that they do not have ownership of yet. A donor may transfer the property they receive as their share from the joint family property at the time of partition.
No consideration
Property that is being transferred as a gift should not have any consideration associated with it. Love and affection do not constitute consideration. In case any monetary consideration is involved, the very nature of transference of property as a gift is destroyed. The transfer becomes similar to a sale in such situations as it is not gratuitous.
Free consent of the donor
The offer to transfer the gift should be made by the donor voluntarily. The donor should not be forced, coerced, or under any undue influence. In situations wherein a gift deed is said to be made under undue influence, the unconscionability of the transaction must be proved. The mere relationship between the donor and the donee is not conclusive to exercise undue influence.
Competency of the donor
Section 7 of the Transfer of Property Act (1882) deals with the competency to contract while dealing with gift deeds. It states that the donor or the transferor should have attained the age of majority, should be of sound mind, and should not be otherwise disqualified as per the law. So, a minor does not have the capacity to be the donor of a gift deed.
Acceptance of gift
A gift deed is valid only if the donee accepts it on their own. In situations wherein the donee is a minor, acceptance of the gift deed can be made on their behalf by their guardian. Here, on attaining the age of majority, the donee may either accept or reject the gift. The donee must accept the gift during the lifetime of the donor. As per Section 122 of the Transfer of Property Act (1882), a gift deed is void if a donee dies before accepting it.
Types of gift deeds
Revocable gift deed
In the case of revocable gift deeds, the legal document stays with the donor till they decide to hand it over to the donee. The gift can be revoked by the donor at any time during their lifetime. Here, the donor has no legal obligation towards the donee.
Irrevocable gift deed
In the case of irrevocable gift deeds, the donee legally becomes the owner of the gift as soon as they physically receive the gift. Once this is done, the donor cannot revoke the gift. A gift deed cannot be revoked once it is executed and registered unless the requirements of Section 126 of the Transfer of Property Act (1882) are fulfilled.
Making of a gift deed
There are no specifications regarding who can make a gift deed. The only requirement is that the donor should be competent as per Section 7 of the Transfer of Property Act (1882). That said, there are certain clauses that have to necessarily be present in a gift deed for it to be valid. They include the following-
Constituents of a gift deed
Date and place
The date of execution followed by the place at which the execution is taking place should be mentioned in the gift deed.
Free will of the parties
The donor should be transferring the property of their own accord and not due to any coercion, undue influence, threat, or fear. Their intention of voluntarily transferring the gift should be clearly mentioned in the gift deed.
Details about the property
All the details regarding the property being transferred should be mentioned in the gift deed so as to avoid any probable uncertainties or ambiguities that may arise. This includes an exhaustive description of the property’s location, structure, area, and the like.
Consideration
The gift deed should clearly state that the consideration involved is limited to love and affection. The fact that there is absolutely no monetary exchange involved should also be clearly stated. In case there is any consideration of material value involved, then the transaction will not be considered as a gift.
Possession of the property
The property which is being transferred by the donor to the donee should be in the possession of the donor at the time of the transfer. This means that the transfer is valid only if the concerned donor is the titleholder of the property. This should be stated with proof of ownership in the gift deed.
Information about the parties involved
All the information regarding both the donor and the donee should be clearly stated in the gift deed. This includes their names, residential addresses, date of birth, and other relevant details about them.
Relationship between the parties involved
The relationship between the donor and donee should be mentioned in the gift deed. Gifts made out to donees differ based on the nature of the relationship they share with the donor. For instance, if the donee is a blood relative of the donor, the parties may avail certain privileges like a stamp duty concession.
Related rights and liabilities
Any rights and liabilities that are related to the transaction which have to do with either of the parties should be stated clearly in the gift deed so as to avoid any future discrepancies regarding the same. This includes all rights or liabilities attached to the gift, for instance, matters like whether or not the gift is allowed to be further sold or leased.
Additional rights conferred upon the donee
The rights of the donee should be clearly mentioned in the gift deed as it forms an inseparable part of it. This would also act as proof in the case of future problems that may arise regarding various aspects of the property being gifted, like its rent, profit, basic structure, and the like. The donor should clearly state the additional rights and authority over the property they are conferring upon the donee.
Delivery of the gift
It is necessary for the gift deed to contain a delivery clause that expressly or impliedly talks about the action through which the delivery of the possession of the property is confirmed. This would facilitate clarity regarding the status of the transaction.
Revocation clause
Many gift deeds contain revocation clauses even though it is not mandatory. This is because they help solve any future conflicts that may arise regarding the revocation of the gift deed. It may be expressed or implied and is highly recommended. That said, both the parties involved should expressly consent to this clause for it to be applicable.
Signatures
Both the parties involved should sign the gift deed once it is drafted for it to be valid and legally binding.
Witnesses
The gift deed should be drafted and signed by both parties in the presence of two competent witnesses for it to be valid and legally binding.
Registration of a gift deed
According to Section 17 of the Registration Act (1908), a gift deed is valid and legally binding only once it is registered. The subsequent stamp duty payable on registration varies depending on the state. Section 123 of the Transfer of Property Act (1882) addresses registration of gift deeds too. In this Section it is stated that the registration of a gift deed is necessary for immovable property to be validly transferred as a gift. It is also mentioned that the gift deed ought to be signed by the donor and the donee and be attested by two witnesses too. The gift deed is to be drafted on stamp paper which should also be signed by both the parties involved and be attested by two witnesses. Even the stamp paper is to be registered as per this Act.
Tax implications of a gift deed
As per Section 56 of the Income Tax Act (1995), gift deeds are completely tax-exempt provided that are below Rs. 50,000 in value without any consideration. If the amount exceeds Rs. 50,000, then, the entire amount received is liable to be taxed under the head of ‘income from other sources as per the Income Tax Act (1995). That said, there are certain exceptions to this. For instance, any wealth or property that a donee acquires from their close relatives or at the time of their marriage will not be taxed. This applies to any wealth or property one receives under a will too.
Revocation of a gift deed
Section 126 of the Transfer of Property Act (1882) deals with the suspension or revocation of a gift deed. This Section lays down two modes of revocation namely, revocation by mutual agreement and revocation by rescission.
As per the former approach, a gift deed may be suspended or revoked on the happening of an uncertain event that is not within the donor’s scope. Here, the gift deed is not revoked solely on the donor’s will. The condition of revoking the gift in such circumstances should be expressed and not implied. In the case of Mool Raj v. Jamna Devi (1995), the Court held that unconditional gifts cannot be revoked by a donor. A condition laid down under separate mutual agreements between the donor and the donee which are concerned with the gift deed is valid and enforceable. So, they can be grounds for revoking the gift. This was stated by the Court in the case of Thakur Raghunath Ji Maharaj v. Ramesh Chandra (2001).
Another method to revoke a gift deed is by rescission as contracts. Since a gift is a voluntary transfer of ownership by the donor to the donee, proving that the consent of the donor was not free is grounds for revoking the gift. Section 126 of the Transfer of Property Act (1882) states that a gift deed can be revoked on all the grounds on which a contract can be revoked. As per Section 19 of the Indian Contract Act (1872), in situations wherein the consent of the donor is obtained through coercion, undue influence, fraud, or misrepresentation, the contract of the gift is voidable at the option of the donor. In case of the donor’s death, if any gift they gave is to be revoked on these grounds, then their legal heirs may sue on their behalf. All gifts being revoked on these grounds ought to be done within 3 years from the date the donor learns of it. Apart from the aforementioned grounds, there are no other ways through which a gift deed can be revoked.
This deed of gift made this ______ Day of __________(month) ____________ (year) between;
Mr. __________________, Age ____years,
Resident of _____________________
(Hereinafter called the “Donor”) of the One part
And,
Mr/Miss ___________________, Age ____ years,
Resident of __________________
(Hereinafter called the “Donee”) of the other part.
Witnesseth as follows:
In consideration of natural love and affection being the son/daughter of Donor, the donor hereby assigns to the donee a sum of Rs._____________ (amount) to be held by the donee absolutely.
The possession of the Rs._____________(amount) vide cheque No. ________Drawn on _____________________ , _____________ Branch dated _/_/__ hereinabove donated unto the donee and has been physically handed over to the donee as absolute owner before execution of this Gift Deed.
The said gift of Rs.______________(amount) has been accepted by Mr/Miss ___________________________.
The donor from this date reserves no right or interest on the said sum hereby gifted which shall from this day be the sole and exclusive property of the donee.
The property hereby gifted is the donor’s self-acquired property accumulated out of income earned and has full right and authority to dispose of the same in any manner he may think fit.
In witness whereof, the parties hereto have put their respective signatures on this deed of gift in presence of witnesses.
SIGNATURE, NAME AND Donor
ADDRESS OF THE WITNESS
Relinquishment deed : an overview
Relinquishment of property refers to the process by which the legal heir of a deceased person transfers their property in the favour of another legal heir. It is usually applicable in situations wherein a person dies intestate, that is, without writing a will. Here, the deceased person’s property is automatically inherited by their legal heirs. So, their legal heir now has the authority to decide what should be done with the inherited property. Relinquishment of property takes place when the legal heirs decide to transfer the property instead of keeping it and the legal document in which the legal heir formally releases their rights over the inherited property and transfers it to the other person is called a relinquishment deed.
Essential elements of a relinquishment deed
For a relinquishment deed to be valid, there are certain essential characteristics it should possess. They include:
Must be in writing
The relinquishment deed should be in writing if it is regarding an immovable property. It should also be signed by the parties involved.
Witnesses
The relinquishment deed should be drafted and signed in the presence of two witnesses for it to be valid and legally binding
Multiplicity of inheritors
For a relinquishment deed to be valid, there should mandatorily be more than one person who is inheriting the relinquished property.
Must be in favour of a co-owner
A relinquishment deed cannot be made in favour of any third party. The beneficiary of a relinquishment deed should necessarily be a co-owner of the property. In simpler terms, a relinquishment deed can only be made out from one legal heir to another. If this is not the case, then the transfer is treated as a gift rather than a relinquishment of property.
Effect
After the process of relinquishment of property is formalized by the signing of the relinquishment deed, the share of the legal heir transferring the property is reduced and the share of property owned by the legal heir benefiting from this relinquishment increases with immediate effect.
Irrevocability
Once formalized, a relinquishment deed cannot be undone or revoked even if the parties allege that that transfer was made in error.
Consideration not mandatory
A relinquishment deed containing no consideration is valid and can be registered. It may or may not require consideration.
Making of a relinquishment deed
Any person who has a share in some property can relinquish it. All the essentials of a valid contract stated under Section 10 of the Indian Contract Act (1872), are applicable to relinquishment deeds as well. Some of the other content that is to be necessarily mentioned in a relinquishment deed are mentioned below.
Constituents of a relinquishment deed
Title and introduction
All relinquishment deeds must necessarily have a title. This can either be ‘Relinquishment Deed’ or ‘Deed of Relinquishment’. It should also have an introduction and clearly mention the date of creation.
Details of the executants
All relevant details regarding the person making the relinquishment deed, that is the person who is legally inheriting the property in question should be stated. They are commonly referred to as the executant or releasor of the property. Relevant details include full name, address, name of spouse, and the like.
Details of the shares
All the parties involved should clearly mention the proportion of shares they are holding at the time of the relinquishment along with all other relevant details regarding their shares.
Executant’s statement of release
The executant should clearly mention that they are releasing their share of the inherited property in favour of the beneficiary of their own accord and without any financial transaction involved. Alongside this declaration, the property description should be stated again and the executant should also state that they do not have any rights over the relinquished property hereafter.
Registration of a relinquishment deed
As per Section 17 of the Registration Act (1908), a relinquishment deed is valid and legally binding on the concerned parties only after it is registered. Additionally, it is mandatory for the registration to be made at the office of the Sub-Registrar that happens to be closest to the property in question. The cost of registration varies based on the state the relinquished property is in.
Revocation of a relinquishment deed
It is not possible to revoke a relinquishment deed. However, if the situation calls for it, the parties involved are allowed to challenge it in the Court on certain grounds of law. This includes situations wherein the deed is formulated using coercion, fraud, misrepresentation, or other such unlawful means. If any party does not agree with this, the matter is resolved in a civil court. That said, cancellation of a relinquishment deed can only take place within the first three years of registration.
Deed of Relinquishment is made on this ———the day of——— by ————, residing at——— (hereinafter called the First party which expression shall unless repugnant to the context thereof shall deem to include heirs, executors, administrators and assigns) OF THE FIRST PART.
AND
—————- Residing at —————– (hereinafter called the second party, which expression shall unless repugnant to the context thereof shall deem to include heirs, executors, administrators and assigns) OF THE SECOND PART.
Whereas the Party of the First Part is the legal heir of the deceased Late Shri/Smt.————– who died interstate.
AND WHEREAS the said Shri/Smt. —————– has left behind him a property i.e. flat no.———– situated in ———-admeasuring about ——- sq. ft. consisting of ————— rooms at—————.
AND WHEREAS the second party has been residing with the deceased since last————— years.
AND WHEREAS during the lifetime of Shri/Smt.—————– he had expressed his desire to bequeath the said, flat to the party of the second part.
AND WHEREAS the party of the first part was also aware of the same and as such for transmitting share an interest in the said flat no.———— in favor of the party of the second part and the first party has shown his readiness and willingness to execute necessary documents by relinquishing his share and interest as a legal heir in the said property.
AND WHEREAS mutually it has been agreed that for the said share and interest as legal heir in the said property of Late Shri/Smt.————— for consideration of Rs—— to which the second party has agreed to give to the party of the first part.
AND WHEREAS the second party in order to become the exclusive owner of the premises, the first party relinquishes and ceases to have any right, title or interest therein.
AND WHEREAS it is necessary to bring this fact on record.
NOW, THIS DEED/INDENTURE WITNESSES:
The First Party has released and relinquished in favor of the second party all their rights, titles an interest in the said, flat situated at ———- and to hold the same as the absolute owner along with all furniture and fixture standing thereon.
And the first parties do hereby declare that the said premise has been the exclusive property of the second party with effect from ————–.
That the first party does hereby declare that the second party is entitled to have his name incorporated as the owner of the said, flat in the records of the society by transferring share, title, and interest in his name.
And the first party will do every such assurance or thing for further or more perfectly assuring the property released to the second party as may be reasonably required.
IN WITNESS WHEREOF the parties hereto have executed this instrument on the date, first hereinabove mentioned.
WITNESS
First party
Second-party
Note: The above illustrations are samples of will, gift deed and relinquishment deed and are not exhaustive in nature. While drafting the above documents, it is always advised to receive legal guidance from an advocate or solicitor.
Table distinguishing between wills, gift deeds, and relinquishment deeds with respect to transferability
Parameter for comparison
Wills
Gift deeds
Relinquishment deeds
Nature
A legal document displaying a testator’s intent regarding the transfer of ownership of their property upon their demise.
A legal document for the transfer of a gift in the form of property from a donor to a donee without any consideration.
A legal document wherein a person gives up their legal rights to some specified property and hands it over to someone else with the latter’s consent.
Property type
The property being transferred may be any self-acquired moveable or immoveable property.
The property gifted by the donor to the donee has to be existing property and not future property. It may be inherited or self-acquired.
The property being transferred must necessarily be inherited by the transferor.
Registration
Registration is not mandatory. Unregistered wills are valid and executable too. Should be mandatorily attested. If a testator chooses to register the will, it should be done as per Section 18 of the Registration Act (1908).
Registration and attestation are mandatory. Registration should be in accordance with Section 17 of the Registration Act, (1908).
Registration and attestation are mandatory. Registration should be in accordance with Section 17 of the Registration Act, (1908).
Effect
Effect after the death of the testator.
Immediate effect during the lifetime of the donor and the donee.
Immediate effect during the lifetime of the co-owner towards another co-owner.
Relation
The parties involved can be related in any manner whatsoever. The only restriction is that a witness to the will cannot be a beneficiary.
The parties involved may or may not be related to each other.
The parties involved must necessarily be related to each other.
Beneficiary
Made in favour of any person, trust, business, and even charitable organisation.
Made in favour of a person the donor loves, has affection towards, or is devoted towards.
Made in favour of a co-owner or a family member.
Acceptance
Does not require acceptance.
Requires acceptance during the lifetime of the donor.
Requires acceptance by the person in whose favour it is made.
Consideration
A will does not usually involve any consideration between the parties.
There is no consideration involved between the parties.
A consideration may or may not be involved. It depends on the parties.
Tax implications
Any wealth or property received under a will is tax exempted.
Any money or property received as a gift deed is taxable provided it is not received from a close relative or during marriage.
Relinquishment deeds are not entirely taxable. Tax is only levied on the portion of the property in which the right is relinquished.
Revocation
It is revocable. A will should be revoked as per the provisions of Section 70 of the Indian Succession Act (1925).
It is irrevocable. That said, a gift deed can be challenged in Court if there was any fraud or coercion involved.
It is Irrevocable. A relinquishment deed cannot be revoked even if it does not have any consideration. However, it can be challenged in Court on the grounds of fraud and coercion too.
Examples
If A leaves behind a document stating that their property is to be divided equally between B and C upon their death, the document in question is called a will.
If A wants to give a share of his property to B out of love and affection, with no consideration involved, then the document used to formalize the process is called a gift deed.
Upon A’s death without a will, his daughter B can leave the share she inherited from A on account of being his daughter to her brother C by using a relinquishment deed as an instrument.
Conclusion
The process of estate and succession planning involves various aspects that have to be considered carefully. They must take a decision only after weighing all odds and ascertaining the most profitable and beneficial solution.
The most common instruments of estate planning are wills, gift deeds, and relinquishment deeds. While it comes down to making a choice between the three, it depends on the specifics of the situation and is subjective. For instance, in cases wherein inheriting the property after the death of the testator is the best suited, a will would be ideal. Contrarily, if the donee wants to bequeath the interest in the property right away during the lifetime of the donor, a gift deed would be the best-suited choice. That said, the person’s objective alone will not be the sole deciding factor.
To achieve the most ideal outcome while dealing with estate and succession planning, a person has to consider various other factors like the related costs and tax implications too. It is recommended that people consult legal and tax experts while dealing with such matters.
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This article is written by Khushi Sharma pursuing B.A.LLB from IIMT, IP University (Trainee Associate, Blog iPleaders). This article deals with the difference between Civil Law and Criminal Law.
As a law student or anybody related to the legal field we might know every branch that the law of our country expands to, but a layman may only have basic knowledge of the law. Two of such branches to which everybody is acquainted are Civil and Criminal laws. These two subjects are the usual heads under the law which probably covers the major part of it as well. A generic difference can be ascertained by anyone but in this article, we are going to analyse in detail what all is covered under Civil and Criminal laws.
The law of India has a wide variety of segregations under it because of our widespread population which causes infringement of the laws by people and infringement of people’s rights. Due to the increase in such acts, a variety of legislations were needed to be presented in India which provided us with many types and branches under the law. The law of India is divided into the following heads of the law –
Public and Private Law;
Civil Law and Criminal Law;
Substantive and Procedural Law;
Municipal and International Law.
Apart from these we also have Common Laws and Statutory Laws. These above-mentioned laws cover a huge variety of acts and legislations under them thus enabling India to have so many different laws from which we are going to focus on Civil & Criminal law, and their differences.
Civil Law
Civil laws in a generic sense mean an injury or harm caused to an individual or any other private property (corporation) by the act or the behaviour of any other person. The acts committed by the party are non-criminal in nature under Civil laws. It commonly deals with solving disputes between parties. Civil laws usually deal with relief by providing compensation or fine to the aggrieved party or to the Court. Damages caused by Civil laws are to be managed by compensation. Civil law does not create an offence against society at large, unlike Criminal Law.
Features of Civil Law
Civil law being so dynamic is stuck with many varied features and distinguishing essentials which are as follows –
Civil law is a branch of law in which cases are tried under Civil Courts and Tribunals relating to that.
The damages caused to either of the parties are resolved by paying them an amount of money and not through imprisonment.
They are a set of codified laws and decisions which are binding on the parties involved.
Civil law is greatly inclined towards contractual obligations as contract law is the major branch of the same.
Branches under Civil Law
As mentioned above, Civil Law being so vast has a bunch of dynamic branches constituting a very fruitful legal career for the people involved in it. The working machinery under Civil law focuses on providing dispute resolving mechanisms to the parties. Civil law has many varied branches, many of them are codified, some are defined and some are based on precedents. Following are the branches available under Civil laws –
Contract Law
The Contract law is one of the most widely practised and used civil laws. A contract law includes legally enforceable agreements and contracts and provides effective remedies and procedures for enforcing contractual relations in general. It provides pertinent remedies for breach of contract and how an injured party can seek relief from the court of law. It is a very commonly used branch under Civil law. The statute governing Contract law is the Indian Contract Act,1872. The Contract Act regulates all the legally enforceable contracts and explains what contracts are valid and which are not.
Tort Law
Tort law is also a widely used branch of Civil law. Tort in Common Law jurisdiction is Civil law. It includes damage or harm caused by a person to another person which creates a legal liability towards the person who has caused harm to the other party. The aggrieved person can claim damages from the other person who committed a tortious act. It can include acts like negligence, trespass, invasion of privacy. Most of the tort law is uncodified and doesn’t have any prominent statute regulating it.
Administrative law is the division of Civil law that governs the activities of branches of government. Administrative law is related to executive branch rulemaking, adjudication or enforcement of laws. Civil law countries have specialized administrative courts that review these decisions. Administrative law deals with making decisions for the units of government.
Business/ Corporate/ Commercial Laws
Business laws are the laws that revolve around business and commerce. This branch of Civil law deals both with public and private laws. It applies rights, regulations, laws and duties related to commerce and business. The corporate section of the Civil law is responsible for laws related to companies. It regulates the formation, dissolution, investments of the business or the company. Some of the legislation regulating business and corporate laws are the Companies Act, 1956, Sales of Goods Act, 1930, SARFAESI Act, 2002, Indian Partnership Act, 1932.
There are many more branches of Civil law that are commonly seen in the legal profession like Tax law, Property law, Media/Entertainment law, Sports law etc.
Code of Civil Procedure, 1908 and Civil Law
Code of Civil Procedure, 1908 is the law that is behind the procedure of civil proceedings. The institution of a case is explained in the Code of Civil procedure (CPC) and other procedures related to Civil Law. The code is divided into two parts – the first containing 158 Sections and the second part containing the 1st Schedule which has 51 Orders and Rules. All the proceedings under Civil law must be in accordance with CPC for taking action in the Court. CPC is an important tool for Civil litigation. Budding lawyers to specialise in Civil law must be thoroughly well versed with it.
Criminal Law
Criminal law is the law that relates to crime and its related punishments. Criminal law deals with offences that are against conventional society. It is a crime against the state because of the evil nature of the crime and every member of society must know the heinous crime committed and the equivalent punishment given to the accused. There must be adequate awareness in the case of Criminal law rather than Civil law. Criminal law consists of acts that are harmful or otherwise endangering the health or property of a person. Criminal law focuses on punishment and retribution more than dispute resolving as seen in Civil law. The acts constituting under Criminal Law are graver than Civil law as the damage and injury are caused to a person in a way that can be very terrifying for society to imagine and to live.
Features of Criminal Law
Cases under Criminal law are tried under Criminal Courts or Sessions Court.
The harm done to a person is justified by providing equivalent punishments to the perpetrator.
It creates a public offence against the public interest and not a private liability.
It is an infringement of public rights.
Acts under Criminal Law
Unlike Civil law, Criminal law is not varied as such into branches but it has some very important procedural and regulating acts which are required pertinent for being considered as a criminal case. These acts govern all the rules and regulations for criminal acts. Following are the acts under Criminal law –
The Indian Penal Code, 1860
The Indian Penal Code (IPC) is the official code for criminal law in India. IPC is the substantive law of India The Code contains all the offences that are constituted as crimes in India. It explains all the crimes, their essentials and the mentioned punishments for the same. Every crime ever committed in the history of India is mentioned under this code. This Code was created by the recommendations of the First Law Commission of India. The Code contains 23 chapters and 511 Sections in total.
The Code of Criminal Procedure, 1973
The procedure for criminal law is mentioned in the Code of Criminal Procedure (CrPC). It governs the procedural administration of the substantive laws. It also provides information and procedure for the investigation of crime, apprehension of crime, collectiction of evidence, direction for guilty or innocent and provides direction towards the punishment as well. The Act contains 565 Sections, 5 Schedules and 56 forms.
The Indian Evidence Act, 1872
The Evidence Act, 1872 provides for the admissibility of evidence in the court of law. It mentions the way evidence is collected and what types of admissible evidence are present. The Evidence Act also mentions details about the relevancy of facts and how they can be a crucial element in proving the existence of a crime. It gives immense importance to the series of facts committed and all the evidence recorded amidst it. It contains a total of 167 Sections.
Difference between Civil Law and Criminal law
S.no
Parameters
Civil Law
Criminal Law
h
Meaning
Civil law deals with acts related to individuals to which harm caused can be repaid by compensation or monetary relief.
Criminal law deals with a crime that causes damage to a person which is an offence against society as well. The relief of crime committed is to charge the person with Imprisonment.
l
Liability
It creates a private liability against an individual or an organisation.
It creates a liability for the preparator against society and the victim.
Punishment
Justice is given by providing monetary relief against the damages in most cases.
Justice is given by providing the accused imprisonment for a term or fine or both.
t
Triable
Cases under Civil law are triable under Civil Court or equivalent tribunals.
Cases under Criminal law are tried under Criminal Court or Sessions Court.
Objective
Objective of Civil law is dispute resolution between Individuals
Objective of Criminal law is providing justice to the victim by punishing the accused.
Procedural Law
Code of Civil Procedure, 1908
Code of Criminal Procedure, 1973
g
Gravity of offences
Less grave than Criminal
More grave than Civil
Filing of the case
In Civil Cases the aggrieved party files the case
In Criminal Cases, the government files on behalf of the victim
r
Registration
Normally in Civil Cases, the case can be directly filed to the Court.
In Criminal Cases, the case needs to be registered in the police office before the court directly
Infringement
Infringement of private rights
Infringement of public rights
Branches
Corporate law, Family law, Property law, Media law, Sports law etc.
No diversion as such
.
Examples of Acts
Negligence, Invasion of privacy, Trespass etc.
Murder, Rape, Kidnapping, theft etc.
Conclusion
There is an indeterminate difference between Civil and Criminal law. Both being the most important branches of law have their own unique sets of regulations and rules. Civil and Criminal laws are regulated by strong legislation and procedural laws. Civil law has dispute resolution machinery whereas Criminal law has retribution machinery. These two branches of law cover most parts of the law. People willing to choose between them can choose any as they are very important for the effective working for our country. Branches of Civil law are more varied than Criminal law. Civil law has many diversions as we observed, it contains Property law, Corporate law, Business Law and many more. Some branches of Civil law are uncodified such as torts but under Criminal law almost all the laws and regulations are codified, so each and every point which distinguishes both the law stands out and creates full-fledged machinery for our country to work and eliminate crime efficiently, whether it’s in the offices or roads.
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We frequently assume that debt adds unnecessary stress and generates financial uncertainty. Unquestionably, having too much debt is not a good thing for a corporation or an organisation. A company’s balance sheet with too much debt might result in excessive debt-servicing costs, which include interest payments. As a result, organisations that are in debt may see unpredictable earnings.
Any company can raise funds from two sources: debt capital or equity capital. Without a doubt, equity capital is beneficial since the firm just has to share earnings with the shareholders rather than paying a fixed monthly interest rate that may be excessively high. As a result, debt repayments deplete the company’s cash flow.
So, is it bad for a company to raise capital through debt?
Borrowing money to support a company’s operations and expansion is undeniably a wise move, but only under the appropriate conditions. In contrast to equity capital, which entails selling a portion of the company’s ownership rights to investors through the issuance of stocks, in debt capital, members of the company are not required to give up control and significant influence over the company’s operations. However, it is important to remember that too much debt might stifle a company’s growth.
Definition of debentures
The term ‘Debentures’ is derived from the Latin word ‘debere’ which means to borrow, defined under Section 2 (30) of the Companies Act, 2013 which states that any instrument of a company demonstrating a debt, whether constituting a charge on the company’s assets or not. It can be issued as collateral security for the company or as consideration other than cash where the company can issue debentures to vendors against purchases made to acquire some assets for the company.
Features
Debentures have documentary value. It is an instrument issued under the common seal of the company. These documents serve as proof of debt. This demonstrates that the company owes a debt to the debenture holder.
Issuing debentures ensures that the ownership and control is not diluted to the investors.
Debenture interest is always paid at a predetermined rate. Furthermore, whether the company earns profits or not, it must pay interest.
Debenture holders have no voting rights at the company’s annual meeting.
The company has the option of repaying the loan or converting the debenture into shares or can issue additional debentures.
Debentures may or may not be charged against the company’s assets. That is, they can be granted with or without collateral.
Debentures, in general, are transferrable. Debenture holders can sell them at any price on stock markets.
Debenture holders are given priority when it comes to repayment during liquidation.
Advantage of raising capital through debt
Have you ever considered how debt may benefit a business? To commence with, the Government supports debt since the interest may be deducted from corporate income tax, which is one of the highest in the world. This deduction is highly appealing. It lowers the company’s debt cost after accounting for the interest tax deduction. It would be irrational to fund a public company entirely with equity. It is far too inefficient. Debt is a lower-cost source of funds that allows equity investors to earn a higher return by leveraging their money. In other words, the cost of debentures is lower than that of preference shares and equity shares. As a result, debt financing enables a company to leverage a modest amount of money into a much larger sum, allowing for faster expansion. Moreover, debenture issuance is beneficial during periods of inflation.
Disadvantage of raising capital through debt
Taking on too much debt increases the likelihood that the company may have difficulty paying loan payments if cash flow declines. Investors will also view the firm as a bigger risk and will be hesitant to make more stock investments. In addition to it, lenders often insist that some assets of the company be kept as collateral, and the director is frequently needed to personally guarantee the loan. Moreover, payments of principal and interest must be made on the stipulated dates every time. Companies with erratic cash flows may have difficulty paying loan payments. Sales declines might cause significant difficulties in reaching loan payment deadlines.
Types of debentures
A company can issue debentures based on several parameters such as security, tenure, and convertibility.
Based on Security
Secured debentures
Secured debentures are debentures in which a charge is levied on the enterprise’s properties or assets for payment.
Unsecured debentures
Unsecured debentures are those that are not guaranteed by collateral security. There will be no explicit assets set aside to cover unsecured debentures.
Based on Tenure
Redeemable debentures
Redeemable debentures are those that are due at the end of the period, either in a lump sum or in installments throughout the enterprise’s existence. Debentures can be redeemed at a premium or at par.
Irredeemable debentures
Irredeemable debentures, also known as perpetual debentures, do not have a redemption date. They are redeemed either upon the company’s liquidation or, according to the conditions of the issue, when the company chooses to pay them off to decrease its debt by providing advance notice to the debenture holders.
Based on Convertibility
Convertible debentures
Convertible debentures are debt instruments that can be converted into equity shares or any other security at the discretion of the firm or the debenture holders. These debentures are either fully convertible or partially convertible.
Non-convertible debentures
Non-Convertible Debentures cannot be converted into shares or other securities. The majority of debentures issued by companies come into this category.
Condition on the issuance of debentures (Section 71)
According to Section 71 of the Companies Act of 2013, a company can issue debentures with the option to convert them into shares, either whole or partially, at the time of redemption. Notwithstanding, the issuance of debentures with a conversion option must be approved by a special resolution voted by the shareholders at a duly called general meeting of the company.
No company can issue debentures with voting rights.
The company cannot offer debentures to more than 500 people unless one or more debenture trustees are appointed. When a company issues debentures, it must maintain a debenture redemption reserve account out of its earnings available for dividend payment, and the money credited to such account may not be used by the company for any purpose other than the redemption of debentures.
A debenture trustee will take steps to safeguard the rights of debenture holders and to address their grievances.
Any provision in a trust deed or contract covered by a trust deed exempting or indemnifying a trustee from liability for breach of trust shall be null and void.
A company is required to pay interest and redeem debentures in line with the terms and conditions of their issuance.
Who can issue debentures
Debentures can be issued by corporations and governments. Governments often issue long-term bonds with maturities of more than ten years. These government bonds are considered low-risk investments since they are backed by the government.
Can a Private Company that is publicly listed issue debentures
Yes, under the Companies Act of 2013, a private company can issue bonds/debentures. There are laws regarding asset cover, credit score rating, debenture redemption reserve, holding liquid assets for current maturities, and so forth. After complying with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a private company can do a private placement as well as list it on the BSE or NSE in the debt category.
Convertible debentures
A convertible debenture is a sort of long-term debt issued by a company that may be converted into equity stock after a predetermined period. Convertible debentures are often unsecured bonds or loans with no underlying security to back them up.
Since a company can issue wholly or partly convertible debentures. Partially convertible debentures are a sort of debt. A set fraction of these loans can be converted to shares. The conversion ratio is calculated at the start of the debt issuing process. Whereas, fully-convertible debentures, on the other hand, have the option to convert all of the debt into equity shares based on the parameters established at the time of issue.
These long-term debt securities, like any other bond, pay interest to bondholders. Convertible debentures are distinguished by the fact that they can be exchanged for shares at defined intervals. This feature provides the bondholder with some security, which may mitigate some of the dangers associated with investing in unsecured debt.
Condition of conversion of debentures into equity shares
A convertible debenture is a composite asset that combines the characteristics of debt and equity securities. Convertible debentures are fixed-rate loans issued by companies that make set interest payments to bondholders regularly. The number of shares received by a bondholder for each debenture is decided at the time of issue using a conversion ratio. Bondholders can choose to keep the bond until maturity, at which point they will get a return of their principal, or they can convert the debentures into stock. The debenture is often only convertible into stock after a specific period, as indicated in the bond’s issuance.
However, a convertible debenture often pays a reduced interest rate since the debt holder has the opportunity to convert the loan to shares, which benefits the investors. As a result, investors are ready to accept a lower interest rate in return for the option to convert debentures into ordinary shares. As a result, convertible debentures enable investors to participate in buying shares at increased prices.
Benefits of convertible debentures
Convertible debentures are composite financial instruments that attempt to establish a balance between debt and equity.
Investors are paid a set rate with the ability to participate in any growth in stock price.
Investors can retain the bond until maturity and get interest income if the issuer’s stock price falls.
In the case of a company’s collapse, convertible bondholders are paid before shareholders.
Drawbacks of convertible debentures
Convertible debentures may appear to be lucrative on the surface, but they do have significant limitations, which are as follows-
In return for the opportunity to convert to stock, investors receive a lower interest rate than regular bonds.
Investors may lose money if the stock price falls as a result of the bond-to-equity conversion.
Bondholders face the risk that the company will default and be unable to repay the principal.
Redemption of debentures
Redemption of debentures refers to repaying or clearing any outstanding obligations and loans to the debenture holder or lender who provided the loan, essentially settling the loan once its duration expires. It is accompanied by a set of terms and conditions agreed upon by both parties regarding the loan or debt repayment.
Method of redemption of debentures
The Companies Act, 2013 does not prescribe any rigid method or condition for the redemption of debentures. According to Rule 18(7) of the Companies Share Capital and Debenture Rules 2014, at least 15% of the face value of the debenture amount must be repaid during the fiscal year in which the company invests in designated securities. This must be completed by the 30th of April of the maturity year. Furthermore, companies should keep in mind that the DRR account must be created in any financial institution in India that is authorised by the Reserve Bank of India.
The redemption of debentures can be accomplished in a variety of ways. These can be classified as follows:
Payment in lump-sum on the debenture’s maturity
The whole amount of debentures is paid to the debenture holders as a single full quantity of money at the end of a defined time, i.e. at the debentures’ maturity.
Payment in installments after the maturity date
In this form of debenture redemption, the borrowed funds are repaid in a series of payments, which may be regular or irregular, depending on the terms of the debenture’s redemption requirements.
Redemption through the purchase of the debenture on the market
Companies and corporations are eager to sell their debentures on the open market. They can also opt to cancel them immediately, allowing the company to extend the maturity of the debenture until the payment is appropriate for its financial capacities. Furthermore, if the debentures are purchased on the open market at a discount, the company can take advantage of the chance to decrease the overall redemption payment, hence enhancing overall business income.
Redemption through the conversion of debentures into new debentures or equity shares
The terms and conditions of the conversion of such a debenture are addressed to the holder at the time the debenture is issued. Such debentures are converted to fresh debentures, or the company might issue equity shares at par, at a discount, or even at a set premium.
Conclusion
As with equity financing, the company must determine whether or not to retain some control over the company while continuing to operate debt-free. It will raise future responsibilities with debt financing, but the future of the company will stay in the hands. Most companies will require some type of debt financing for additional cash as it enables the company to invest in the resources it requires to expand or requires cash to purchase equipment, machinery, supplies, inventory, and real estate. The real issue with debt financing is that the borrower must ensure that they have enough cash flow to satisfy the loan’s principal and interest commitments. Both options have distinct attractions and trade-offs. Therefore, before making any permanent decisions, a company should conduct research and examine a variety of issues.
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This article is written by Ishan Arun Mudbidri from Marathwada Mitra Mandal’s Shankarrao Chavan Law College, Pune. This article explains the concepts of contingent contracts and wagering agreements and compares the two.
Table of Contents
Introduction
The debate as to whether a contract and an agreement are one and the same is an eternal one. After going through both these concepts, we come across their types. Two such types are contingent contracts and wagering agreements. Now, the term contingent means depending on the happening of a certain event, and wagering also means the same. But one is a contract and the other is an agreement, so there are certain distinctive features in both these terms which the article unravels.
What is a contingent contract
As far as basic understanding goes, a contract is an agreement signed by two parties that is enforceable by law. But to make it more interesting, the terms and conditions in a contract are modified according to one’s benefit. One of such contracts is known as a contingent contract. The term contingent means an act that depends on the happening or non-happening of another act in the future. A contingent contract is a contract whose validity depends on an uncertain event in the future. Let us take an example, A agrees to pay 30,000 to B, only if B tops his final-year exams. Now, this is a contingent contract as B may or may not succeed in his exams.
The Indian Contract Act 1872 which governs everything relating to a contract, mentions the term contingent contract in Section 31 to Section 35. Section 36 talks about a contingent agreement. Let us analyze all these sections through a table:
SECTIONS
SIGNIFICANCE
Section 31
A contingent contract is defined as a contract to do or not to do something on the happening or non-happening of a future uncertain event.
A contingent contract to do or not to do something, can be enforced by the law only after the event has happened in the future.Example:- A promises to gift B a luxury car if B marries C. C dies before marrying B, so now the contract shall become void.
A contingent contract on the non-happening of an event can be enforced by law if that event becomes impossible.Example:- X promises to pay Y a sum of money if a certain plane does not arrive on Monday. The plane arrives on Monday, so the contract is void.
If a contract is contingent on an event and depends on how a person will act in the future, such contract shall be deemed impossible if that person makes the event impossible to happen.Example:- A promises to give a gift to B if he wins the 100m running race. C wins the race. Hence C’s act of winning the race makes it impossible for B to win it. Although a rematch can happen, but this event is considered impossible
Section 35
If a contingent contract to do or not to do anything at an uncertain event happens within a fixed time, it shall become void if the event has not happened and the time has lapsed or if before the expiry of the time fixed the event becomes impossible.Example:- C agrees to buy D a luxury car if their plane carrying valuable cargo returns on Monday. However, the plane crashes in the ocean and all the cargo gets destroyed. Hence this contract shall be void.
Section 36
If an agreement to do or not do anything is contingent on an impossible event, then such an agreement shall be void irrespective of whether the parties knew about the impossible event or not.
Essential elements of a contingent contract
The important ingredients to term a contingent contract are as follows:
Happening or non-happening of an event
As we glance at the above table, Section 32 and 33 talk about the enforceability of a contingent contract on the happening or non-happening of an event. So the contract will only be valid depending on an uncertain future event. The event can happen at any time, but it must happen.
The event should be collateral to the contract
The term collateral means secondary or additional so the happening or non-happening of an event should not depend on the contract. It should be secondary to the contract and exist independently.
The condition must be contingent and not promissory
The enforcement of a contingent contract depends on an uncertain future event, which can be said as a condition. But this contingency cannot be termed as a promise as the future event is uncertain. So there’s a clear difference between a promissory condition and a contingent condition. In the former case, the person has to abide by an obligation that can be postponed to a later date but has to be followed, whereas in the latter there’s no obligation as the contract depends on a future uncertain contingency. For example, A promises to buy B the Indian cricket team’s jersey, if they win the match today. Now, this is a contingency as there’s no guarantee whether India will win the match. In the same example, A promises to buy B the jersey if he pays him the money, then this will be a promissory condition that depends on the performance of a duty.
An uncertain event
Both parties to the contract should not be aware of that event. It should be an uncertain future event. If the event is certain, then it will be termed as a normal contract and not contingent as both parties are aware of it and will perform their obligations accordingly.
Contract should not be dependent on the promisor
The contract should not be at the will of the promisor. It should totally depend upon the happening or non-happening of a future and uncertain event. The promisor cannot dictate the terms of the future event.
Performance of the contract cannot be postponed
Just by postponing the time stipulated for the contract, it cannot be termed as a contingent contract. Both parties should have no idea about the future date and time of the event. For example, a person agrees to sell his property but decides to start the process on the 31st of the next month. This won’t be a contingent contract. For the contract to be contingent in the above example, the person should sell his property at an uncertain future event of which both parties do not have any idea about.
Importance of a contingent contract
A contingent contract, in many instances can come in handy. If you want to avoid the hefty terms and conditions of a contract, then you can try signing a contingent contract. This contract avoids the risk of losses that either of the parties must incur in case the contract breaks. This is because, in a contingent contract, the contract becomes valid on the happening or non-happening of a future event. The event has to be uncertain. So there’s no clarity as to where this contract shall end up, until and unless the future event happens.
Further, both parties do not have to agree on the terms of the contract, the uncertain future event shall decide that. So both the parties have to live with any difference of opinion arising due to the contract. Another important aspect of this type of contract is that the parties cannot re-negotiate the terms of the contract if the future event does not happen according to how they want it. Any negotiations, discussions about the contract will have to be dealt with by the parties before the event happens.
Depending on the future event, one party benefits and the other does not. This reduces the need for long court proceedings as both parties have already committed their willingness to enter into such a contract. This helps to maintain a good relationship and builds trust between both parties.
Lastly, either party cannot gain control over the terms of the contract and the future event, as the event is collateral or secondary to the contract and does not depend on it.
Famous case laws
In the case of Nemi Chand and Ors. v. Harak Chand and Ors. (1965), it was observed by the Court that Section 32 of the Indian Contract Act 1872 states that a contingent contract to do or not do anything depends on the happening of an uncertain future event and till then the contract cannot be enforced. This fact is true. However the party who claims that the contract shall be void as the event has become impossible should try the matter and file a plea, not only on the question of law but also on the question of fact. If the party does not want to try the matter, then it is not the responsibility of the Courts to consider the case suo moto.
In the case of Commissioner of Excess Profit Tax v. Ruby General Insurance Co. Ltd. (1957), the respondent (Ruby General Insurance) was an insurance company providing life, fire, and marine insurance. All the premiums received by the company relating to fire insurance were shown as assets, but 40% of this were shown as unexpired risks and liabilities. The appellant contended that the remaining portion must be liable to be deducted out of the total capital received in the year. The respondents argued that the portion kept aside as unexpired risks, is a contingent liability and not a contract of insurance. The Court observed that the portion kept aside as unexpired risks, cannot be included in the total capital of the business, so it should not be deducted. It was further held that a contract of insurance is included in the scope of a contingent contract.
Analyzing a wagering agreement
People get confused between the terms wager and bet. One might find it weird but, a bet is a wager and a wager is a bet. To put this in simple words, betting means to put something as collateral on the line depending on the outcome of an event, which in turn means to wager. Now when people bet, they enter into an agreement. Say, for example, A agrees to pay B Rs. 1000 if India wins the cricket match today. Now if India loses the match then B will have to pay A those Rs 1000. Hence this is known as a wagering agreement, where there’s a win-lose situation for both parties depending on the outcome of a certain event. This agreement is risky as one party gains a profit and the other incurs a loss as a result of which, disputes and arguments may arise. Section 30 of the Indian Contract Act 1872, mentions the term wagering agreement. If you closely notice, Sections 20 to 30 of the ICA mention those agreements or contracts which are void, i.e., forbidden by the law. Hence Section 30 states that an agreement where money is paid to either of the parties on the happening or non-happening of an event is void. Courts shall not entertain any matter in which money won by way of wager is claimed to be recovered.
Gambling or betting was never tolerated by the Indian legal statutes. Article 301 to Article 307 of the Indian Constitution which mention the provisions relating to trade and commerce, does not include gambling. Gambling is considered res extra commercium, meaning that certain things are unresponsive to being traded and are outside commerce. Currently in India, the Indian Contract Act, 1872 is the only legal statute relating to wagering agreements. The provisions in this Act were supplemented by the Avoiding Wagers (Amendments Act) of 1865.
Features and essential elements of a wagering agreement
A wagering agreement is different from that of a normal agreement. So let us look at some characteristics of a wagering agreement:
Mutual profit and loss
A wagering agreement is a mutual agreement. This means that both parties mutually agree to either suffer a profit or a loss depending on a future event. So, if one party loses the wager, then he/she has to pay a sum of money to the other party. The reward for the wager can be anything that has a monetary value. If one party knows the outcome of the uncertain event, then this won’t be termed as a wagering agreement. None of the parties must have control over the event. For example, A and B mutually agreed to enter into a wager. The terms were that if C tops the exam, then A will pay B Rs 2000, and if not then B shall pay the same to A. This is a mutually agreed wager.
There must be two parties
For a valid wagering agreement, there must two parties. This is quite obvious as a single person can wager with himself, say, for example, A does a wager with himself that if he does more than 30 push-ups in a minute, then he will eat a cheesecake and if he doesn’t then he’ll have to go for an extra one-mile run. So this can happen but such a situation will not be termed as an agreement. It is the basic rule of law that for a valid agreement there must two parties. The same is the case with a wagering agreement.
The agreement extends only to a wager and nothing beyond that
As I mentioned earlier, none of the parties can control the outcome of the wager. Further the only condition of the agreement should be a wager depending on the outcome of a future event. If the parties have any interest beyond this condition, then the wagering agreement shall not be valid. For example, X enters into a wager with Y. If X’s food tech start-up gains at least 50,000 customers in 6 months, then Y shall pay X a certain monetary sum, and if it doesn’t hit the target, then X shall pay Y the same amount. However X later realized that depending on the outcome of their wager, Y also wants a 20% stake in his start-up. Hence such a situation shall not be termed as a wagering agreement.
Exceptions to a wagering agreement
By now, we might have got a little understanding of what a wagering agreement actually is. But, there are certain situations that do not fulfill the conditions of a wagering agreement. They are as follows:-
Contract of insurance
A contract to get insurance might be the most important exception to a wagering agreement. This is because it does bear resemblance to a wager. In an insurance contract, the party providing financial compensation known as the insurer has an insurable interest in the contract. This means that the company protects the party who has taken insurance from financial loss due to an unexpected bad event. Hence, this type of contract is known as a contract of indemnity which protects the parties from incurring a loss. The main objective of the parties is to protect from loss, and not gain profit from the happening or non-happening of an event. If the insurer does not have an insurable interest, then this contract can be termed as a wager.
Horse racing competitions
A horse racing competition also involves betting. People bet on their desired horse to win the race and earn money from it. So is this a wagering agreement? No. Section 30 of the Indian Contract Act 1872 has clearly mentioned that a wager involving a horse race shall not be considered a wagering agreement, so it is not void. However in India, state governments offer permits for such competitions. A horse racing competition is based more on skill rather than luck. Thorough preparations are required before the race like training the horse, his food, maintenance, etc.
Games requiring skill
We often come across the term gaming contracts. For example, A and B both play a game of FIFA (football) on the PlayStation. The twist here is that if A wins the game, then B shall give him a treat and vice versa. However this cannot be termed as a wagering agreement, as video games require skill, and the outcome of the game does not depend on luck. In the case of MJ Sivani v. State of Karnatka (1995), the scope and legal validity of video games was examined. It was observed by the Court that gaming means to play, and as the game is not unlawful, there shouldn’t arise a question of whether it involves skill or luck.
Share market trading
The stock market has turned out to be a gold mine for many people over the years. One might wonder whether trading on the stock market, is a wager as people buy and sell shares from one party to the other. However, this is not considered a wager and is completely legal.
Famous case laws
In the case of Babasaheb Rahimsaheb v. Rajaram Raghunath Alpe (1930), both parties were wrestlers and entered into an agreement. The terms of the agreements were that they had to wrestle each other on a certain date in Pune. Next, if any of the parties failed to appear for the match, the other party had to pay Rs. 500. Lastly, the person who wins the match was to rewarded with Rs. 1,125 as per the earning of the event. The defendant (Rajaram Alpe) failed to appear for the match. Hence the plaintiff (Babasaheb Rahimsaheb) claimed Rs. 500 as per the terms of their agreement in court. The trial court rejected the plaintiff’s plea. The plaintiff argued that as the winner of the event was uncertain and the agreement is a wager, so the defendant has to pay him the desired money. The Bombay High Court observed that the term wagering agreement is not defined in the Indian Contract Act 1872, and as per the definition given by Sir William Anson it is a promise to pay money on the determination of an uncertain event. In the present circumstances, the agreement was that the winner gets the entire price money and the loser walks away empty-handed. The loser failed to win the prize and did not forfeit anything on his own. Hence the Court held that this example doesn’t come under the term wagering agreement because the price money to be given to the winner was from the people who were to buy tickets for the event.
In the case of Gherulal Parakh v. Mahadeodas Maiya and Ors. (1959), the appellant (Gherulal Parakh) and the respondent (Mahadeodas Maiya) entered into a partnership. They signed an agreement which stated that the respondent on behalf of the firm, will enter into contracts with other people but the profits and losses will be shared by the parties equally. One of such contracts went wrong and the respondent had to compensate the entire amount which the appellant did not. Hence the respondent filed a suit to recover the amount from the appellant and contended that the agreement to enter into a wagering contract is not unlawful under Section 23 of the ICA. The appellant contended that wagering contracts are void under Section 30 and illicit within the meaning of Section 23. It was held by the Court that the wagering contracts are void under Section 30, but not forbidden by law. An agreement that is collateral to the wagering contract is also not unlawful under Section 23. Hence the contentions must be negatived.
How do they differ
As we have seen what contingent contracts and wagering agreements actually are, they do sound very similar. But as one is a contract and the other is an agreement, it is important to know the difference between the two, because both of them are well regulated under the Indian Contract Act 1872 and any confusion while dealing with both these documents can lead to serious consequences. So let us look at some of the distinctive features that separate a contingent contract from a wagering agreement, through a table:
POINTS OF DIFFERENCE
CONTINGENT CONTRACT
WAGERING AGREEMENT
Type of document
A contingent contract is enforceable by the Law. This means that any contract based on the happening or non-happening of an event that is opposed by law, shall not be considered a valid contract.
A wager is an agreement that can be enforceable or non-enforceable by law.
Mentioned under
A contingent contract is mentioned in Section 31 of the Indian Contract Act 1872, and is legally valid.
A wagering agreement is mentioned in Section 30 of the Indian Contract Act 1872. According to this Section, wagering agreements are considered void.
Definition
Section 31 of the Indian Contract Act states that a contingent contract is a contract to do or not to do something depending on the outcome of a future uncertain event, which is collateral to this contract.
The Indian Contract Act does not define the term wagering agreement. However, a wager means to either profit or incur a loss by betting on something depending on the outcome of a future uncertain event.
Interest
In a contingent contract, there is an interest in the contract, as an act will be done depending on the uncertain future event.
In a wagering agreement, the only interest is in whether I have gained profit or incurred loss, depending upon the outcome of an event.
Uncertain Future event
An uncertain future event is secondary or collateral to the contract. It does not determine the outcome of the contract
An uncertain future event is the only factor that determines who has won the wager.
Reciprocal Promise
In a contingent contract, there may or not be reciprocal promises.
In a wagering agreement, reciprocal promises are involved.
Conclusion
After analyzing both these concepts, the question of whether a contingent contract is better than a wagering agreement should not arise because a wagering agreement is void under the Indian Contract Act 1872. A contingent contract is valid but risky at the same time, as the performance of the contract depends on an uncertain future event. Hence it is only safe to say that while entering into a contract or agreement, it is better to abide by and follow all the elements and rules that make a contract legally valid.
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This article has been written by Oishika Banerji of Amity Law School, Kolkata. This article provides a detailed analysis of contracts getting discharged as a consequence of the operation of law and lapse of time.
Table of Contents
Introduction
A contract is a legally binding agreement that generates rights and duties for the contracting parties. It is critical that all contract parties fulfil their obligations and duties in accordance with the contract’s conditions. The term ‘discharge of contract’ refers to a situation when a contract’s contractual relationship between the parties comes to an end. It is essentially the end of the parties’ contractual relationship. The duties of the party or parties come to an end when a contract is discharged. This article details out the concept of discharge of contract, highlighting specifically on the discharge of contract by the operation of law and lapse of time.
Discharge of contract : all you need to know
A contract imposes certain obligations on one or more of the parties concerned. When these requirements are fulfilled, the contract is discharged. A contract can be discharged in a variety of ways.
The phrases “discharge” and “termination of contract” are frequently interchanged. A contract can be discharged by the conduct of the contracting parties or by the operation of law. However, there is a narrow line that separates the phrases discharge and contract termination. When the parties to a contract perform or discharge their duties and obligations in accordance with the contract, this is known as the discharge of contract. When contracting parties fail to fulfil their duties or obligations, the contract is terminated.
For example, A threw a party at her house and hired some dancers to perform, promising to pay them their money. The dancers arrived at the gathering to perform. A pays their payments in accordance with the contract’s provisions. Here, the performance of the dancer will amount to the discharge of the contract since the terms of the agreement have been completed. The dancers’ failure to perform will result in contract termination.
Grounds for discharge of contract
Performance-based discharge
Actual performance or attempted performance might be used to terminate a contract. When each of the contracting parties has completed what they pledged to do under the contract, it is said that actual performance has occurred. When a promisor promises to perform under a contract but the promisee refuses to accept it, it is considered a discharge by attempted performance.
Discharge by mutual agreement
The contractual parties may agree to terminate the existing contract in one of the following ways:-
Rescission
Rescission occurs when a contract is declared null and invalid, meaning it is no longer legally binding. The courts have the power to release non-liable parties from their contractual duties and, when practicable, will endeavour to put them back in the position they were in before to the contract’s signing.
Alteration
When one or more of the contract’s provisions are amended, the contract is said to be altered. If all parties agree to a major change in a written contract, the old contract is discharged by the change and a new contract is formed in its stead.
Novation
The newly added party becomes accountable with the establishment and enforcement of the new contract, and the party that is so substituted is relieved of its duties under the previous contract. This signifies novation.
Remission
Accepting a lesser quantity or degree of performance than what was contracted for in full fulfilment of the contract is referred to as remission. There is no need for discussion or a fresh agreement for such a release or guarantee.
Waiver
Waiver is defined as ‘abandoning’ one’s rights. The contract is dismissed when one of the parties abandons or waives his rights. Here, both the parties mutually agree that they shall no longer be bound by the contract. It’s essentially a release from contractual responsibilities for the parties involved.
Merger
A contract can also be discharged by a merger, which occurs when an inferior right arising from a contract merges with a superior right ensuing to the same party. The prior rental agreement is no longer valid.
Discharge by breach
The contract is said to be discharged by breach when a contractual party refuses or fails to perform, hinders themselves from performing, or makes the execution of the contract impossible due to their actions. An actual or anticipatory breach can be used to terminate a contract. An actual breach occurs when the default occurs on the due date of performance, whereas an anticipatory breach occurs when the default occurs before the due date of performance.
Discharge by lapse of time
When a contract stipulates that it must be completed within a certain amount of time, failing to do so leads to the contract being discharged due to the passage of time.
Discharge by supervening impossibility
A contract that was legitimate at the time of creation may later become impossible or unlawful to fulfill, and the contract will be dismissed as a result. In any of the following situations, a contract becomes void due to supervening impossibility:-
Destruction of subject matter.
Change of law.
Non-concurrence of circumstances.
Death or incapacity for personal services.
The outbreak of war.
Failure of the ultimate purpose of the contract.
Discharge by operation of law
In the case of any of the following, a contract will be discharged by operation of law:
Death or incapacity of the promisor in case of personal services.
Insolvency.
Rights and liabilities vest with the same person [merger of rights & liabilities].
Unauthorised material alteration.
Loss of sole evidence of the contract.
Exceptional cases when a contract is not discharged by the supervening impossibility
Performance difficulty
Unexpected circumstances, such as transportation service disruptions, might make it impossible to complete a contract. This issue makes performance difficult, but it does not result in contract termination.
Impossibility from a commercial standpoint
Commercial difficulties render the contract’s performance unprofitable or economically unviable. As a result, commercial hardship caused by an increase in the price of inputs (raw materials) or overhead costs will not result in contract termination.
Riots, lockouts, civil unrest, and strikes
Contracts are not terminated by these circumstances unless there is a condition in the contract that states that the contract will not be completed or that the period for performance will be extended in such situations.
Failure of one of the objects
When a contract is put into for many objectives, the failure of one of the objects does not result in the contract being terminated.
Impossibility owing to a third-party failure
When a party’s performance of a contract is contingent on the performance of a third party, the contract is not discharged by the third party’s failure or default.
Impossibility created by oneself
A contract is not discharged due to any party’s self-inflicted inability.
Section 62 of the Indian Contract Act, 1872
Under the heading, ‘effect of novation, rescission, and alteration of contract’, Section 62 of the Indian Contract Act, 1872 states that “if the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the previous contract need not be fulfilled.” Whether or not a contract has been novated is an issue of fact in each situation. In the case of novation, alteration, or recession, this section needs the consent of both parties. However, unilateral novation, alteration, or recession can proceed if it was either anticipated in the original contract or if the novation, alteration, or rescission is accepted under sub silentio, i.e., inferred approval by silence. The words ‘the original contract need not be fulfilled’ plainly suggest that the old original contract is discharged totally and is not to be performed due to the three situations listed in this section. The ingredients of Section 62 have been explained hereunder:
The term ‘novation’ refers to when the parties to a contract agree to replace an existing contract with a new one.
Alteration of a contract occurs when one or more of the contract’s provisions are changed by mutual consent of the contracting parties. In the case of United India Insurance Co. Ltd v. M.K.J. Corporation (1996), it was determined that no major change may be made by one party without the approval of the other, even if both parties are acting in good faith.
Rescission of a contract occurs when all or portion of the terms of the contract is annulled.
Doctrine of frustration with respect to discharge of contract
The doctrine of frustration is a subset of the law of discharge or contract arising from the inability or illegality of the agreed-upon conduct and hence falls under the ambit of Section 56 of the Indian Contract Act, 1872. It is false to assert that Section 56 of the Indian Contract Act, 1872 only applies in circumstances of physical impossibility and that where this section does not apply, the rules of English law on the issue of frustration must be used. It must also be maintained that to the degree that the Indian Contract Act, 1872 covers a specific issue, it is exhaustive, and it is not admissible to apply English law principles outside of these legislative provisions. The decisions of the English courts have merely a persuasive value and may be useful in demonstrating how the English courts have resolved issues in situations comparable to those before the Indian courts.
The issue before the Calcutta High Court in the landmark case of Mugneeram Bangur and Co. v. Gurbachan Singh (1959) was whether a land-sale contract was discharged and came to an end as a result of intervening or supervening circumstances. The Court had opined that the requisition orders and/or work stoppages that resulted had no effect on or destroyed the foundation or fundamental basis of the contract in question, which cannot be claimed to have been frustrated or discharged as a result. Therefore, the frustration defence was correctly rejected in this case. Due to the lack of a time limit for the construction of roads and other infrastructure, construction may be completed within a reasonable period, which, in light of the foregoing and the circumstances of this case, may well include the requisition period or other periods that, while uncertain, would be temporary.
Contract frustration renders the contract unenforceable and relieves the parties of their contractual duties. Section 65 of the 1872 Act, on the other hand, provides that if an agreement becomes void, the person who obtained any benefit under it is ‘obliged’ to return it or compensate the person from whom he received it. The question is whether this clause applies to contracts that have been rendered invalid due to frustration. The frustration of a contract happens due to circumstances beyond either party’s control or fault, and as a result, a party should not be forced to recompense in such circumstances. However, failing to provide enough compensation may result in the other party suffering a loss.
Discharge of contract by operation of law
Generally speaking, a contract can be discharged by its own terms. The contract is said to be discharged by operation of law when the parties’ contractual duties are terminated due to the involvement of the law.
The term ‘operation of law’ refers to the components of the law that are automatically given. For example, by default, rights and duties might be assigned to or put on a certain individual. When you employ an attorney, your power of attorney forms will almost always include the words ‘operation of law.’ This is a frequent feature that attorneys attach at the conclusion of a power of attorney form to specify when the same will expire. For example, they may state that they are the client’s attorney and that all of their powers will stay in force until the client revokes the power of attorney or the power of attorney expires by law. As it pertains to many contexts, the legal concept of operation of law can take several forms.
The operation of law, in its most basic form, indicates that someone can be held accountable for certain responsibilities or obtain certain rights as a result of existing legal standards, independent of their intentions or desires. Law can also place prohibitions or limits on someone, limiting what they can and cannot do. If a contract cannot be enforced, it will be terminated by the operation of law. This can include cases where one or more of the contracting parties were not of sound mind, were under the influence of drugs or alcohol or were not of legal age. Furthermore, if one party was intimidated or compelled to engage in a contract, the contract’s duties or responsibilities can be terminated by the operation of law, if this can be shown.
While termination by operation of law implies that the duties or obligations have been ended as a result of the contract’s termination, discharge signifies that an individual or party has been released or emancipated from certain obligations. For example, when someone files for bankruptcy, any debt that a person has is discharged by law when they apply for bankruptcy. This does not indicate that the obligation to return the money was completed or cancelled, but rather that the individual is no longer legally obligated to pay their creditors. In a nutshell, the debt has been cancelled by law.
Death
When it comes to contracts requiring personal talent or aptitude, death terminates the contract. In other instances, the rights and responsibilities of the deceased person are transferred to his or her legal representatives.
Insolvency
When a person is declared insolvent, he/she is released from any obligations committed previous to the date of his/her declaration. With certain exceptions, the insolvent’s rights and obligations are transferred to an officer of the court known as the Official Assignee/Receiver upon insolvency.
Merger
When a contract’s rights and obligations are vested in the same individual, the contract is discharged and no further performance is necessary.
Lapse of time
A contract can be cancelled due to the passage of time. Contractual responsibilities and liabilities are barred by limitations in civil litigation. The law’s provisions are detailed in the Limitation Act, 1963.
Unauthorised material alteration
If one party to a contract significantly changes the terms without the approval of the other parties, the contract is dismissed and no longer remains enforceable.
Loss of evidence of the contract
In the event that the only proof of the contract’s existence is lost, the contract is dismissed by operation of law.
Discharge of a contract by lapse of time
If the performance is not accomplished within the specified time, the contract will be discharged. This will also result in a breach of the said contract. In this instance, the person can bring a lawsuit in court to vindicate their contract rights. The Limitation Act of 1963 allows a person to file a lawsuit in court. If the time limit specified in the Act ends, the contract is discharged, and the promisee is unable to enforce the promisor. Put simply, if the promisor fails to fulfill his/her obligations and the promisee fails to act within the prescribed time frame against the same, the promisee cannot be deprived of his/her legal recourse. Here, the contract is said to be discharged due to the lapse of time.
Take for example, Peter borrows money from John and pledges to pay it back in monthly installments over the following five years. He, on the other hand, does not pay a single installment. John called him a few times before getting busy and subsequently took no action on the same. Three years later, he approaches the court for assistance in reclaiming his funds. The court, however, dismisses his claim since he has crossed the time limit of three years to recover his debts.
We can also take an example of A and B who get into a contract where A promises to sell 20 packages of surgical masks to B and B in return agrees to pay Rs 500 for the same. The contract between A and B is set to be executed on 10th June 2021. On 5th June 2021, A informs B that it will not be possible for her to carry out the conditions in the contract entered with B. The type of breach that A commits in thai scenario is anticipatory in nature. The two options that are open to B, the affected party are:
Election to cancel the contract, or
Election to keep the contract alive which happens when performance of contract holds relevance over compensation to be paid to the affected party.
Legal provisions encompassing discharge of a contract by lapse of time
Section 2(j) of the Limitation Act, 1963 describes the term “period of limitation” as the period imposed by the Schedule for any action, appeal, or application and “prescribed period” as a period of limitation computed in accordance with the provisions of the 1963 Act. The Limitation Act of 1963 stipulates that a contract must be completed within a certain time frame, known as the term of limitation. If it is not executed, and the promisee does not take action within the time limit, the promisee loses his/her legal recourse.
Conclusion
The concepts of discharge of contract by the operation of law and lapse of time both are technical and clarified by nature. They as legal terminologies are transparent enough for a common individual to understand them. Both these types of discharge of contract hold significance with respect to day-to-day activities.
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